The Cranky Economist

Welcome Back! And SAL

2005-06-11T08:00:00.000-04:00

Welcome back, Cranky Friends. Since last we spoke, more than a month ago, I've been busy getting set up at my new job, elsewhere in the media world but at a publication that publishes a little more often than once every three months. So I haven't had time to post. And I'm still not sure that I do. But I'll try anyway. So, without further ado, a welcome back SAL.

Assets

Scott Carson. The Boeing chief salesman has been working miracles (subscription only), on track to surpass Airbus in new orders this year. After falling behind the state-subsidized European aircraft maker in recent years, Boeing is making a comeback, aided by a compelling new model (the long-range, mid-sized B787) and important changes to the structure of Boeing's sales team, empowering more people to make decisions in dealings with clients. Contrast that with Airbus, who's competing A350 is a disaster with wings (rather than doing intensive pre-design customer research a la Boeing, Airbus has opted to tinker throughout the design process; no wonder the plane is already behind schedule and over budget), and whose sales team is dependent on sales chief John Leahy (which is why it ground to a halt for a time when he went into the hospital for an appendectomy). No wonder no one wants the A350.

Liabilities

Eliot Spitzer. The over-reaching New York state attorney general got a well-deserved slap from a jury in the case of Theodore Siphol, a former Bank of America broker who allegedly broke the law by engaging in "after-hours" trading of mutual funds. Except that, as the jury noted, the activity in which Siphol engaged (he didn't deny that he had done it) wasn't actually illegal. Mutual funds are only priced once a day, and although that occurs late in the day, the law is ambiguous about whether that time should mark the end of the day. Many brokers had thought that it didn't, and "after-hours" trading was quite common until Spitzer decided that he wanted to run for governor, er, I mean until an observant crusader for the little guy realized that small investors were being taken advantage of. As the Wall Street Journal noted in an editorial yesterday, this case is also significant because it marks one of the few times Spitzer has actually had the balls to take a case to a jury, and that jury saw right through him. I say, if he wants to run for governor, more power to him. But he shouldn't clog up the courts (and ruin reputations and shareholder value) to do it.

Surprise, surprise

2005-04-19T11:00:00.000-04:00

I know I'm off to a late start today, but I'll try to make it up to all you FOCEs with somewhat more vigorous posting than you've seen over the past few days.

I'll start with the news that General Motors posted a $1.1 billion net loss for the first quarter, and announced that it won't release an earnings forecast for 2005.

As Reuters reports it, the company blames this loss mainly on several one-time charges, although a mounting crisis traceable to union compensation (especially health care costs) and thinning sales in the face of neglected product development form the backdrop for this announcement.

All well and good, although I really don't buy the explanation that attributing the result to one-time charges makes things any better. Just look at the one-time charges described in the article -- reorganizing European operations (because the company has been failing there) and idling a plant in Michigan. They may be one-time expenses, but they point to a longer-term decline if something doesn't happen to turn the company around soon.

What a relief

2005-04-18T06:35:00.000-04:00

Also in your newspapers this morning, a report of the G-7 meetings held over the weekend in Washington. The main story seems to be that they are still not supporting debt relief for third-world countries. Which is actually good news.

It's not that the Cranky Economist supports trapping poor nations in obscene piles of foreign debt. Quite the contrary -- I'm deeply suspicious of the World Bank/IMF method of "development financing." Why, you ask? Well for starters, after fifty years of doing it that way, where's the development? These loans have a nasty habit of propping up despots who then embezzle the money for their own purposes (worth remembering lest anyone think Oil-for-Food was an isolated event). And under the loan regime, officers at the Bank and IMF have perverse incentives to make loans without any consideration for whether the country will be able to repay. Just read Tropical Gangsters, the account of a World Bank officer in Equatorial Guinea. It climaxes with a long meeting at the end when Bank officials gather and start fudging numbers to be able to give the counry a loan. No wonder there's a debt problem.

But the debt wouldn't necessarily be a problem if the countries were growing fast enough to pay it off. They aren't doing so because the developed world finds plenty of other ways to keep them barefoot, pregnant and in the kitchen, as it were. Such as blocking agricultural trade with them.

I'm uneasy about the idea of debt forgiveness because a.) it's a dodge that keeps the first world from tackling the root causes of third world poverty, and b.) because it will only help the bad political leaders who benefited from the loans in the first place.

Don't get me wrong -- the debt is a big problem. But erasing it might not be the best solution.

Monday morning M&A

2005-04-18T06:20:00.000-04:00

Good morning, faithful FOCEs. I know you've been distraught by my sparse posting the past few days, and there's bad news -- the problem will get worse before it gets better. The Cranky Family is in town today, so I'll be doing some Cranky Sightseeing. But before I leave, a couple stories that merit comment:

First, Adobe is buying Macromedia. This strikes me as a noteworthy event for several reasons. Principally, it's a big deal. As excited as we have all been about the MCI story, it is only one of many mergers and acquisitions that have been launched in the past few months. And that's good news. The uptick in M&A activity is a sign of business optimism.

This particular merger is also worth noting from an excited-tech-geek perspective because it holds out the promise of all sorts of innovations to come from the new company. As suspcious as I usually am about the rationale for mergers and acquisitions, this one seems to make sense. It could just be opening the door to a variety of new Internet document technologies we can't even imagine today.

Saturday Assets & Liabilities

2005-04-16T07:20:00.000-04:00

Although I feel somewhat like a liabiliity myself for not having posted as much over the past couple days, I present this week's assets and liabilities as a way of getting myself back on track:

Assets

The U.S. House of Representatives, who this week voted to repeal the estate tax. The theory is that this tax redistributes wealth from the rich to everyone else. If that's true, I'm still waiting for a check for my share of the Rockefeller fortune. In reality, at "best" it double-taxes assets in the estate, and at worst it provides ample incentive for the outrageously wealthy to shunt their money into a variety of tax shelters so as to cleverly avoid any tax. Three cheers to Congress for trying (again) to remedy this situation.

Liabilities

The Europea Union (of course), this time for blocking imports of American genetically modified (GM) animal feed. I've posted already on the GMO issue below, so for here is merely suffices to say that this is a load of Belgian-cow manure. There is no actual scientific evidence that these genetically modified organisms are dangerous. The furur in Europe over this issue has been stirred up by a coalition of eco-weenies and cynical pols. At least the U.S. economy can absorb the hit from this ban. Third-world countries dependent on agricultural trade with the EU can't. So three jeers to the EU for perpetuating a costly myth.

On a fast train to nowhere

2005-04-15T19:01:00.000-04:00

My apologies, dear FOCEs, for not blogging today. It was a busy and eventful 24 hours, and for better or worse I was too busy to blog. But no fear -- I'm back. I leave this post for all you poor sods with nothing better to do on a Friday night, with perhaps more after I get back from dinner because I have nothing better to do on a Friday.

In honor of my Cranky Travels to the Big Apple yesterday, I bring you this Bloomberg report about the latest trials and tribulations of Amtrak's high-speed Acela Express service (which I did not use, to ease the Cranky Budget). The brakes, it appears, are cracking.

So is the veneer on the idea that this high-speed rail idea was a good one. Sure, the Northeast Corridor between Washington, New York and Boston is the only profitable part of the rail network. And I'm willing to believe that high-speed trains are the best way to compete effectively with the airline shuttles. And I'm sure with proper marketing, careful schedule and reliable service, the train could do just that.

But how you get from those suppositions to the notion that it would be wise to design the trains from scratch (instead of borrowing bullet-train designs already used for years in Europe and Japan) is beyond me. Should we now be surprised that the trains were rolled out late and have been plagued by one technical problem after another? Of course not. Did anyone think that this process would not end in eternal litigation as Amtrak and the manufacturers sue each other to the Chattanooga Station and back? If you though we'd avoid that scenario, here's the bridge link. Should we be appalled at the waste of our taxpayer money? I sure am.

I ride Amtrak periodically, but have not enjoyed the Acela Express experience yet. My main experience with the service is seeing it flagged as "delayed" on the boards in stations every time I ride a regular train. Amtrak is presumably embarassed about this latest episode. Well, they should be. Surely we ought to be able to make the trains run on time.

While we're on the subject of taxes...

2005-04-14T06:41:00.000-04:00

This particularly obnoxious column from the BBC decries, among other things, tax avoidance -- the practice of exploiting legal loopholes in the tax code.

Again, let's consider this for a minute. "Exploiting legal loopholes." The loopholes are perfectly legal! Why are we lambasting big corporations and rich individuals for plying their lawyers' knowledge of the tax code to reduce the tab on April 15? I'm not angry, I'm jealous!

The tax loophole is a creation of (largely liberal, although sometimes conservative) efforts to manipulate the tax code for social engineering. Not very often are these things explicitly written into the code. They are frequently unintended consequences of other incentives and penalties that are written into the tax code.

So if we're unhappy that folks are using these perfectly legal means to reduce their tax bills, and those perfectly legal means arise from efforts to perfectly fine-tune the tax code, what again makes us think that more "fine tuning" will close the loopholes?

Maybe we'll let Granny see 2011 after all

2005-04-14T06:40:00.000-04:00

Good morning, FOCEs. The Cranky Economist is in Cranky New York today, so I will not be posting during the day. Instead I give you a veritable feast of items that I prepared last night. Or two. Let it not be said that I'm a stingy opinionist.

We turn first to the estate tax, which the House voted yesterday to repeal permanently. A hot-button political issue in recent years, the estate tax was repealed temporarily in 2001, with the intent that it would re-appear in 2011. Which created a perverse incentive for greedy heirs across the land to off their ancestors before ringing in 2011 (hence the brilliant title on this post).

So let's have us a little discussion of why Congress is finally doing the right thing here, shall we:

First, dispense with the notion that a temporary tax cut can accomplish anything. Time was when I would have said that it was a foolish idea because people would just adjust their behavior to account for their expectation of higher taxes in the future. However, there is now mixed evidence on this. As a friend of mine in high school used to say, "Never underestimate the stupidity of the masses." Mine isn't an empirical objection but a theoretical one. To accept the "stimulus when it's needed" argument requires a couple of assumptions. First, you have to believe that the government can move deftly enough to engineer the economy. Horse hockey.

But the second is the funniest. Democrats who trumpet this line are implicitly accepting the claim that tax cuts are stimulative. Let's follow this line to its logical conclusion. You therefore have to accept that a tax increase will slow the economy, even if you try to argue that the benefits of the government spending are an offset. But how can you argue for the offset if you have already conceded in another circumstance that the tax cut would be more effective than the spending?

But that's just academic. How about the reality of the estate tax? It's just a money grab. Remember, almost all of the assets previously subject to estate taxes had already been taxed amply before. Congress has had one bite at the apple; our elected representatives don't deserve more.

At least one Vioxx suit looks set to bite the dust

2005-04-13T11:25:00.000-04:00

Bad news for a plaintiff in Alabama: Merck purports to be able to prove that the suing widow's husband can't possibly have taken Vioxx before he died of a heart attack a couple years ago.

This New York Times (yeah, I know) article is correct to point out that if this suit is dismissed it will be more a moral victory than anything else. After all, the facts of this particular case are just so bizarre. Although I will venture to add that, from my safe and uninformed distance low these many hundreds of miles away, this case appears to have all the ingredients of the litigation mess to come -- grieving widow, grasping lawyers and groundless charges.

As I have said before, Merck's "crime" was not that it marketed a drug that could have serious cardiac side effects. It was that the company marketed the drug to the wrong people. As sympathetic as we must be towards those who have lost loved ones to heart attacks while taking Vioxx, surely part of the blame lies with doctors who were too quick to prescribe the drug instead of over-the-counter alternatives that are safer for all but the small subset of arthritis patients for whom Vioxx-esque Cox-2 inhibitors really were a Godsend. And I suspect that in many cases we will never be able to sort out how much of a heart attack was caused by Vioxx and how much by deep-fried chicken and Burger King's Enormous Omelet Sandwiches.

All in all, good news from Alabama. But unfortunately, the rest of these lawsuits don't look set to go nearly so quietly into that good night.

Is it you?

2005-04-13T10:45:00.000-04:00

A milestone in Cranky Economistdom is fast approaching: my 100th hit since installing the counter last week. Will it be you? Check the counter at the bottom right-hand column. If it says 100 when you load the blog, let me know who you are so I can congratulate you.

A GM post

2005-04-13T10:40:00.000-04:00

The Cranky Economist is normally reluctant to link to Wall Street Journal content because only Cranky Subscribers can access it. But this week's Business World column from Holman Jenkins is just too good to pass up.

In a nutshell, his argument is that GM is in especially serious trouble because the compounded weight of decades of excessively generous labor contracts is sapping money from R&D. GM has now reached a point where it is cancelling promising new programs because it has to pour so much cash into pensions and health care expenses.

A good point, that, and worth reading in full. If you don't subscribe to the Journal, you should.

An MG post

2005-04-13T10:30:00.000-04:00

Remember MG Rover? Well, if you own a Rover don't count on your warranty -- there may not be enough cash to cover repair bills as promised.

But that's not the kicker in this article (and here you should prepare yourself for some more Airbus bashing): The punchline is that the European Commission is raising a stink about the prospect that the British government will pour money into MG to keep the doors open. Quoth AP (via Forbes.com):

Trade Secretary Patricia Hewitt said the government will review a 6.5 million pound (US$11.7 million, euro3.2 million) loan it granted Rover's administrators earlier this week after production was shut down at the company's Longbridge factory. The loan enabled PwC to pay workers for a week, but the administrator has warned that without further assistance mass layoffs are likely.
...
However, strict European Union rules regarding government subsidies to private companies could prevent any extension of the loan. The European Commission said Wednesday that regulators needed more information from the government about its plans for Rover.

So let's get this straight. The Commission is perfectly content to allow subsidies for a bloated but competitive company (remember, Airbus actually surpassed rival Boeing in orders filled last year). But when it comes to assistance for a bloated but failing company, something has to be done to stop the market distortion.

The issue here isn't even the subsidy -- it's probably a bad idea in both cases. While we all need to be sympathetic for the plight of MG Rover's workers (and as a soon-to-be-displaced worker myself, I certainly am), the fact is that it's probably better to help them by working out direct income transfers via an unemployment compensation program than it is to prop up a company that will go bankrupt either sooner or later.

The real issue is the weird decisions emanating from Brussels. Really, did I accidentally wake up in some Bizarro World this morning? How can they go to the mat for Airbus subsidies but deny the same assistance to Rover? Some things I will just never understand.

More Snow

2005-04-13T10:14:00.000-04:00

Treasury Secretary John Snow has repeated his assertion that Fannie and Freddie should reduce their portfolios.

Today's news is in most respects a House-side reprise of testimony the secretary offered to a Senate committee last week. It's notable principally because it demonstrates that the White House seems to be committed to GSE reform. Always a good thing.

What we need is robots

2005-04-13T08:15:00.000-04:00

Or at least computers to execute our trades on the floor of the New York Stock Exchange. Although at this point I'm sure a lot of people would settle for "specialists" who don't engage in shifty trading of the sort charged against 15 floor traders yesterday.

The real significance of this story is not that there are allegedly criminals gaming the markets. That's old news. This story is interesting because it comes at a very awkward time for the NYSE. Under assault from electronic markets such as the NASDAQ, the NYSE has been fighting to preserve its antiquated but highly profitable specialist system, in which living, breathing (and now, apparently, cheating) human beings manage continuous auctions for shares in listed companies. Antiquated because in the face of the NASDAQ system and others like it, the NYSE is slow and inefficient. Highly profitable because the specialists take a cut of every transaction in fees, so those positions are very lucrative and brokerages are willing to pay the exchange a lot for the privilege of holding them.

The argument, a growing body of evidence to the contrary, is that human specialists are somehow better at matching up buyers and sellers quickly. But this sounds ever more dubious in the face of NASDAQ's ever more sophisticated technology. Meanwhile, the NYSE's trade-through rule, only recently extended to other markets, deprives traders of the level of choice about execution that NASDAQ offers.

Faced with these shifts in the market, any company listed on the NYSE would have to adapt or die. Which makes the exchange's resistance to change somewhat ironic. And as good a place to start on this Wednesday morning as any.

Count on the French...

2005-04-12T14:37:00.000-04:00

...to make things worse. After all, only a Frenchman would think it was a good idea to raise the temperature in already strained U.S.-EU negotiations by talking favorably about the prospects of even more subsidy aid for Airbus.

Ample posts on this topic below.

Don't tax this blog!

2005-04-12T07:00:00.000-04:00

Although the blurb at the top of this page says I'm "Washington-based," that's not completely true. I'm "Washington-area-based." I live in lovely northern Virginia a few minutes south of the District and commute in to my day job each morning. One advantage of which is that I enjoy congressional representation, including the able advocacy of Sen. George Allen, who has come out in support of a bill that would prohibit the Feds from taxing Internet communication. Ain't he a great guy?

The Internet poses an interesting problem for those of a more pro-tax bent. Not only is much Internet activity currently untaxed, but the Internet is quickly providing the means to circumvent more traditional activities that are. One example is voice-over-Internet, or VoIP, telephony, currently subject to federal excise taxes under a provision in the tax code that will sunset eventually if it's not renewed. That provision was passed in 2004 partly to keep VoIP from cutting into tax revenues from standard landlines. And, although this article focuses exclusively on a current discussion about communications taxation, the issue is even larger. Ever notice how you don't always pay state sales tax on online purchases?

So perhaps the best way to put this article into context is to realize that the Internet is now going to provide the same tax competition inside the U.S. market that we already experience in foreign trade (just check out the Airbus-Boeing post below). It's wild-west untaxedness will put pressure on many of the consumption-based taxes we have today.

Longer and more tortuous than a Russian novel part deux

2005-04-11T15:50:00.000-04:00

Not the MCI proxy saga. This time the title refers to Martha Stewart's sentence, upheld today on appeal. That doyenne of domestic divas will dither in her datcha until her 10-month sentence is up.

Judge Cederbaum's argument -- that this is the sentence that anyone convicted of this crime would serve -- would be more compelling if Martha really had committed a crime. But instead she's just guilty of having an unethical stockbroker and a grating off-screen personality.

So again I say, Free Martha!

Longer and more tortuous than a Russian novel

2005-04-11T13:30:00.000-04:00

That seems as good a way as any of describing the saga surrounding MCI's sale. Just when you think it's gotten as exciting as it can -- lawyers, proxy fights, angry investors -- it gets even weirder.

The latest news: Verizon (whose bid makes a lot of sense for the company but not for the shareholders) has announced a deal to buy 13 percent of MCI's stock from a Mexican billionaire. You can't make this stuff up.

The theory is that Verizon can maneuver more successfully through the MCI proxy fight if Verizon has a significant block of voting shares to its name. Elegant from a purely Machiavellian perspective, although notably lacking in charm. Especially because Verizon is offering the Mexican billionaire significantly more per share than the value of their current offer, which has had the unfortunate, albeit presumably unintended, effect of angering a significant block of the owners of the other 87 percent of MCI.

Where this will all end up is beyond my feeble powers of prognostication. But increasingly I have this sinking sense that Qwest will win out. Just so long as I don't have to be in the room when they write the check to Verizon to cash out that 13 percent stake, a nice little bit of Baby Bell icing on the cake after Verizon has already forced Qwest into an outrageously high bid.

Hold the 'Bus part deux

2005-04-11T13:15:00.000-04:00

Now that they have officially avoided today's deadline for an agreement on the U.S.-EU dispute over subsidies for aircraft manufacturers, the Europeans are going on the offensive. As in, their demands this time around are offensively ridiculous. Sure, the EU says, Boeing may not receive the kind of "launch aid" Airbus soaks up from its governmental sponsors. But Boeing pays lower taxes! And, says Europe's trade representative, this has got to stop before the EU will negotiate.

Sadly, this is not as creative an argument as it may at first appear. Tax-happy western European countries have a tradition of whining about the economic success of their lower-taxing neighbors. Ireland's famously low corporate tax rates (and its concomitant famous growth rates) are a perennial sore spot, which explains the nagging calls for "harmonization of economic policies" within the EU. And the entrance of eastern European countries that also have more favorable economic policies has only made the problem worse.

So once and for all: Yes, Europe, there is a difference between stimulative tax breaks and subsidies. If you have your knickers all in a twist about low taxes in Washington State, try cutting your own taxes. Even if doing so makes it harder for you to afford your subsidies to Airbus. Trust us -- low taxes have done wonders in America and Ireland.

Let the deliberations begin

2005-04-11T12:59:00.000-04:00

Mikhail Khodorkovsky's trial nears its conslusion as the court's deliberations begin, following a rousing closing argument by the erstwhile oil tycoon himself. I've posted on this case, and the damage it's doing to Russia's economy, below. For now, I will only remark on how impressive it is that 10 months in a courtroom cage do not seem to have diminished the defendant's vim and vigor nearly as much as it has diminished foreign investors' perceptions of Russia.

Hold the 'Bus

2005-04-11T07:07:00.000-04:00

Airbus, that is. Even though today marks the deadline for a U.S.-EU agreement on subsidies to aircraft manufacturers, no deal has been struck yet. Nonetheless, neither party expects to take the case to the World Trade Organization quite yet. At issue: government support for Airbus and Boeing. Both companies receive various forms of government support. But only Boeing can claim with a straight face that the U.S. government gets something for the money -- most of the "subsidies" come in the form of defense contracts. What to make of the decision not to go running to the WTO right away? Presumably the U.S. is holding back because we want to rebuild a more amicable relationship with Europe. The EU is almost certainly holding back because they know they would lose.

In a weekend that saw Charles and Camilla pledge everlasting marital fidelity to each other, you might think that we were all irony-ed out. Never fear. Just check out these three consecutive paragraphs from the Reuters article linked above:

"We hope it will be possible to continue negotiation. It is of course open for both the EU and the U.S. ... to refer the matter to the WTO. But in our opinion this is better avoided," said Simon Fraser, head of European Trade Commissioner Peter Mandelson's cabinet.

"It is not the EU's intention to move first on WTO action," he told reporters in Brussels.

However, an aide to Mandelson noted that an agreed standstill on fresh aid to the aviation titans would lapse with the deadline on Monday, and EU member states could not negotiate indefinitely because Airbus is expected to seek "launch aid" loans for its new model, the A350.

Some people just never learn.

This week's Sunday NYT feature

2005-04-10T11:15:00.000-04:00

...will not be appearing in this space. My Sunday New York Times has not arrived, and the outlook isn't good for delivery any time today. When I called to enquire, I discovered that there is not actually a human being working anywhere in the subscription department (so apparently it's not just the newsroom...).

Which raises an interesting question about whether this is any way to run a business. The NYT is already in the running for next Saturday's Liability, so it should hope some really juicy scandal displaces it.

Your weekly dose of SAL

2005-04-09T07:10:00.000-04:00

Saturday Assets & Liabilities

Assets

Armando Falcon, Jr. Armando who, you say? For the past five years, he's been director of the Office of Federal Housing Enterprise Oversight (Ofheo), the agency that polices Fannie and Freddie. He also announced Tuesday that he will be stepping down next month, at the end of his current five-year term. Falcon might not have always been the perfect regulator -- certainly many of Fannie and Freddie's worst abuses reached their apex on his watch. But he at least deserves credit for a "death bed conversion" of sorts. Now that those abuses have been revealed, he has been as aggressive as anyone in his shoes probably could be in cleaning them up. Not "perfect world" aggressive, mind you. But he's done his best. Which is better than we've come to expect from the GSEs' protectors on the Hill.

Liabilities

Kirk Kerkorian His lawsuit against DaimlerChrysler was dismissed yesterday. I haven't been following this case very closely at all. I don't profess to be an expert on it. For all of my postings on General Motors, I don't even claim to have much to say about the auto industry in general. So I will just say that this suit always struck me as a bit, well, odd. Kerkorian claimed that management had lied when it called Daimler-Benz's takeover of Chrysler a "merger." Perhaps they did. But who really believed them? Cranky Dad is not an investor, and the business page is not the first section to which he turns when he sits down to read his morning paper. Yet I remember even him joking about how silly it was that anyone would think this was a merger. "Silly" seems like a good word to describe this lawsuit. Those silly disgruntled billionaire investors.

It's not April 1...

2005-04-08T18:30:00.000-04:00

...so I can only assume this is true. The Cookie Monster is going healthy. Two serious comments, and then, well, the joke this one really deserves.

First, just yesterday I noted efforts at General Motors to encourage employees to shape up, on the theory that this would reduce the company's health insurance expenditures. That program caught my eye because it raised the possibility that the private sector would have better incentives, and thus design more productive programs, to combat the health woes that are plaguing America. This Sesame Street program strikes me as what we would end up with otherwise. (Because let's face it -- PBS is a government program, pledge drives and "underwriters" notwithstanding.) Meanwhile, as experts bemoan America's sedentary lifestyle, and especially the degree to which our youngsters now just sit around watching TV, one can't help but note a certain irony here. And will it even reach a meaningful number of kids? Worth asking because...

Second, Sesame Street's new healthy living message will be falling on a declining audience. Under pressure from a terrifying proliferation of cable children's programming (some of which, incidentally, may be pedagogically sounder than Sesame Street), the PBS program's audience has been drifting away for years. So, best efforts to the contrary, you have to wonder what difference it will make.

And now, although the song has probably already been written, I present my Cranky Lyrics to "A Cookie Is A Sometimes Food" (which I've elected to sing to the tune of the Gilligan's Island theme song):

A cookie is a sometimes food,
'Cause it will make you fat;
So if you want to look real good,
You should remember that, you should remember that.

The calories will do you in
The carbs will stretch your waist;
So if you want to be real thin,
You'd better stick to paste, you'd better stick to paste.

With exercise you might get fit
It's a method that is tried;
Still, lest our ratings take a hit,
Watch PBS inside, watch PBS inside.

Well, how did you think...

2005-04-08T17:51:00.000-04:00

...she was paying for all those spices she was smuggling in the Federal pen? Martha Stewart, domestic dab hand, K-Mart conquistadora and wrongly convicted "stock swindler," banked $1.2 million from her company last year, and -- shock! horror! -- spent some of it in prison.

To which I can only comment that she, unlike the MG Rover execs described a couple posts below this, probably deserves it. After all, she managed to charm her way back into the hearts of homemakers, thus helping to insure the survival (and thus employee jobs and shareholder value) of her eponymous media empire.

Yeah, she's home now. But once more, for old time's sake: Free Martha!

The Qwest for popularity

2005-04-08T17:43:00.000-04:00

Reuters now reports that Qwest thinks MCI's shareholders are ready to accept Qwest's buy-out over Verizon's offer. Ample posts on this topic below.

Rover in the doghouse

2005-04-08T16:35:00.000-04:00

Actually, it's worse than that: The MG Rover doghouse will be shutting down. Hope is fading fast on a salvific takeover by a Chinese automaker, and government assistance doesn't appear to be forthcoming for Britain's sole remaining car manufacturer. (This does not, however, necessarily mean that you will never be able to buy a "Rover" again; BMW retains the right to market autos under that brand name thanks to its one-time ownership of the company, which ended in 2000 in a deal the merits of which the Cranky Economist still doesn't completely understand.)

MG Rover's failure has several implications. First, it comes at a terrible time for Tony Blair's Labour government. Earlier this week Blair called an election for May 5, and this is a deeply felt industrial loss for the country. Will it tip the balance in the Tories' favor? Probably not. But it doesn't help confidence in Blair.

Second, look for the closure to re-spark Britain's perennial debate about "fat cat" executives. In an earlier article (to which I intended to link before Blogger crashed on me last night...), the Financial Times noted that MG Rover's current executives look set to walk away from this deal with their big pensions intact. Now, the Cranky Economist isn't generally bothered by large executive compensation packages. If asked, I will opine that the money is worth spending if it buys a company good management. Well, in this case perhaps it didn't. Food for thought for MG Rover's displaced workers and disgruntled shareholders.

Finally, a nostalgic note. From his youthhood, the Cranky Economist has heard Cranky Dad recount fondly stories of his time spent tooling around Belgium in Cranky Grandpa's MG back in the Cranky Day. It was arguably the manliest car Cranky Dad has ever driven; certainly it was far superior to the Datsun and -- gasp -- Dodge Colt that haunted my younger days like hatch-backed apparitions of real cars. And, unlike the "sporty" (?!) 300M currently in Cranky Dad's garage, that MG really was a sports car.

MG Rover, this speeding ticket's for you!

John Paul, Professor of Economics

2005-04-07T15:27:00.000-04:00

I generally operate on the assumption (read: delude myself into thinking) that you loyal FOCEs tune in for my opinions on business and economics. To that end, I generally only link to "hard news" articles, and save the editorializing for myself.

I'll make an exception in this post, however, to call your attention to one of the better analyses of what Pope John Paul II really thought about economics, an article on National Review Online. It's not a terrific explication, but Sirico comes much, much closer than any other commentator I've seen opining on the subject.

The pain's not going away, but the drugs are

2005-04-07T15:00:00.000-04:00

That's the word as the Cranky Economist finally catches up to yet another pharmaceutical story that has been brewing for the past few days. The FDA is forcing Pfizer to take Bextra (an arthritis drug that resembles Vioxx) off the market, citing some of the same cardiac risks that led to Merck's decision to pull Vioxx last fall.

Merck yanked Vioxx, you may recall, after a study found that the drug was responsible for a somewhat increased risk of heart problems among its users. A perfectly reasonable decision in this litigious world in which we live in (to paraphrase McCartney), although in a "perfect world" sort of way it was dubious. Merck's sin was arguably in over-marketing the drug. Sure, it (and other Cox-2 inhibitors like it) probably do increase heart risk. But that risk was worth it to the small subset of arthritis patients for whom traditional medicines like naproxen (Aleve) and ibuprofen (Advil) were causing stomach ulcers. The real problem with Vioxx wasn't that Merck was selling a dangerous drug; the problem was that too many of the wrong people were buying it.

As the Forbes article linked above suggests, there may have been an added wrinkle with Bextra -- its connection to a rare skin reaction -- that might have influenced the FDA's decision as much as the worry over heart woes. But at the end of the day, one has to wonder whether hyper-sensitivity to risk fueld by a hyperactive trial bar might not be influencing some of the thinking here. Within a week of Merck's announcement last fall, I remember seeing ads on TV by some scurrilous trial lawyer trawling for Vioxx clients. I have to wonder, are we whittling away our ability to make sensible trade-offs when it comes to medical care?

Which is not to be too down on the FDA -- the agency has generally been very effective at protecting American consumers. If memory serves, for example, Thalidomide was never approved for use in the U.S. But if the panel appointed to study the issue was split almost down the middle, and the panelists most likely to encounter patients who could benefit from these drugs determined that the trade-offs were worthwhile, one starts to ask what's going on here.

Snow comes down...

2005-04-07T12:01:00.000-04:00

...in favor of smaller portfolios and receivership for Fannie and Freddie (Treasury Secretary John Snow, that is).

Several comments on his testimony:

First, for an extended discussion of the importance of receivership powers, see yesterday's post on Alan Greenspan's testimony to the same Senate committee.

Ditto for a discussion of the issue of the housing GSEs' portfolios. (For an interesting piece about a more technical aspect of this trading take a look at this subscription-only article from this morning's Wall Street Journal, which notes that Fannie developed a habit of keeping the best mortgage-backed securities (MBS) for itself when building its portfolio, and only selling less desirable MBSs into the private market.)

Note disbelievingly, however, Snow's claim that the Treasury would only consider bailing out Fannie or Freddie in the context of an orderly receivership process were one of them to fail.

This issue gets to the heart of the much-discussed "implicit subsidy." Legally, Fannie and Freddie each have up to a $2.5 billion credit line at Treasury -- the Treasury Secretary can issue government bonds up to that amount to shore up either of the enterprises if they run into troubles. Now, this amount is a pittance compared to the GSEs' size. But it's important because it could constitute vital "seed money" around which to organize a massive bail-out. It's symbolically important of the government's commitment to the GSEs. Numerically it's not insignificant. And perhaps every Fannie and Freddie creditor is telling himself or herself that, well, certainly I would get a cut of that money.

So on its face, Snow's claim that he would only extend this credit (which lies within the Treasury secretary's discretion) subject to conditions such as receivership sounds like a positive step. Except that politically it's hard to see how it could be true.

Fannie and Freddie are important issues because their debt is so widely held throughout the financial market. After all, it's viewed to be just as secure as real government bonds. Odds are great that your local bank is holding at least some of its assets in the form of GSE debt. So if one of them were to go under, and that debt were to become worthless, it would cause enormous strain throughout the economy, strain that ordinary people would probably start noticing fairly quickly. So there would be tremendous political pressure for the government to do something to fix it. In the face of impending crisis, and with political pressure mounting, what are the odds that any treasury secretary of either party would have the intestinal fortitude to say "Stop!" until Fannie and Freddie started to behave themselves? Here's the bridge link, in case you were wondering.

All in all, Snow is saying the right things. But we should just make sure that we're applauding him for the "right things" that he's actually likely to follow through on.

Shaping up (the balance sheet)

2005-04-07T10:20:00.000-04:00

The Cranky Economist recently had a Cranky Birthday, which led to an influx of Cranky Monetary Birthday Gifts from some quarters of the Cranky Family. A portion of which, I am happy to report, will have to go towards the purchase of new Cranky Pants, since a new fitness regimen (well, actually, just forcing myself to go to the gym more often) has led to a reduction in the Cranky Waistline over the past two months. And being in shape is doing wonders for my tennis game, as evidenced by last night's victory over one of the Cranky Roommates.

For me, the decision to turn off the TV and head to the gym was fueled by several factors. I found I was too tired and too stressed too much of the time. There are only so many Law & order reruns that any man can watch on TNT, so I was running out of things to do with my evenings. And going to the gym seemed like a more amenable Lenten discipline than fasting.

Which isn't to say that I'm any better in the health and fitness department than anyone else -- far from it. I think my story is just an example of how many factors can drive people to take an interest in shaping up. Which suggests that there may be many possible solutions to America's pressing obesity problem, and the concomitant health concerns -- and expenditures -- that go with it.

All of which comes to mind after reading this article about GM's efforts to reduce healthcare expenditures by encouraging healthier lifestyles (a WSJ article, so unfortunately it's subscription-only). The company believes that treatments for obesity-related ailments such as high cholesterol and diabetes are costing it hundreds of millions of dollars a year, so it is slowly trying to find ways to encourage workers to live in healthier ways.

How is it doing so? Through highly localized tactics. Sure, it has been building gyms in its plants, and has rolled out a series of healthy living courses across the company. But the article describes how, in one plant where deer hunting is especially popular among the workers, the company rolled out a series of fitness classes geared towards teaching people how to shape up for hunting season, and distributed healthy venison recipes.

Which is worth considering at a time when health experts are clamoring for the government to "do something" about America's bad health. Although it's early days yet for GM's efforts, and it's still possible they won't be entirely successful, I suspect that these programs have a better shot at changing behavior than any government program would. It's because private-sector companies like GM are best positioned to respond nimbly to localized needs. Meanwhile, the American system of private health insurance provision gives those companies strong incentives to encourage better health habits. Which is why GM, in its time of financial near-crisis, is turning its attention to healthy living.

Food for thought.

Is the jig up?

2005-04-07T08:06:00.000-04:00

Well, when I went to bed last night, it looked like we were in for a hugely entertaining (for us) and hugely expensive (for Qwest) proxy fight over the fate of MCI. Now, however, Qwest's quest may be over. (Hey now, you have to have expected that lame pun eventually.)

Turns out that MCI has a poison-pill provision that would make any hostile bid hugely expensive.

Another interesting element from this TheStreet.com article is the following passage, which lends support to my suspicion that some of MCI's investors are more interested in cashing out than they are in building a viable long-term company:

Observers say the next step is likely to be a proxy battle in which MCI shareholders are asked to take sides. The vote is expected to be influenced by a number of large investors who may be looking primarily for a rich exit from MCI's stock, which declined sharply last year before being resuscitated by MCI's efforts to find a suitor.

Let the games begin

2005-04-06T20:54:00.000-04:00

I know it's late. And the Cranky Economist is a bit tired after his first Cranky Victory of the season on the Cranky Local Public Tennis Courts. But this is just too good a story to not comment on tonight:

The natives are restless. MCI shareholders are expressing their dissatisfaction with the board's decision to go to Verizon. Qwest is sticking to its guns. Everyone (this being America) has hired lawyers. Let the proxy fight begin!

NB: When you read this article, keep in mind that 11% of the stock is a lot in the proxy world. And that 11% represents an enormous amount of money in its own right.

A dubious rule, through and through

2005-04-06T15:20:00.000-04:00

The SEC, says the AP, is set to approve an extension of the "trade-through rule" to electronic markets such as the NASDAQ. Which is a shame.

The rule, long a mainstay on the floor of the New York Stock Exchange (NYSE) requires brokers to execute trades at the lowest current price. Which sounds great in theory, but doesn't always work that well in practice. For one thing, it can make large trades complicated and uncertain. Hidden behind that price you see in the back pages of your Wall Street Journal every day is a constantly fluctuating auction of shares in a particular company. It arises from the interaction of many sellers and many buyers, each trading different-sized lots (clusters of shares) and coming to the table with different bids and asks (prices at which one is willing to buy and sell a share, respectively). The trade-through rule requires that your trade be executed at the best price, which it defines as the lowest price if you're buying and the highest price if you're selling.

What could be wrong with that? Potentially a lot, if you're a big investor (and those are the ones who count in this argument, since small investors aren't the ones who make the type of trade where this matters, and have no business trying to do so). If you are trying to buy a large block of shares quickly (say, 10,000) but the best price is only available on a 100-share lot, your broker will first have to buy that 100 shares, and then the 5,000-share lot that might offer the next-best price, then the 2,500-share lot with the next-best price after that, and so forth until he has cobbled together your 10,000 shares. This can be a time-consuming process, during which the price may continue to fluctuate. Meaning that you will have an angst-inducing period of up to a few minutes during which you will know that your broker is executing a big, expensive deal, but you won't know just how expensive the deal will be. Which will probably send shares of Pepto-Bismol's manufacturer skyrocketing.

But there's an even bigger philosophical question at stake. Why is the SEC so hell-bent on inflicting an NYSE rule on other stock markets? Currently, NASDAQ and a host of other electronic marketplaces operate without the trade-through rule, and there hasn't been any clamor there to introduce it. In fact, a lot of people who actually execute trades on a daily basis seem to like the flexibility that the NASDAQ system offers to execute a trade precisely how one wants to. (Although many brokerages have publicly supported the SEC's recent move, arguably for political reasons.) If anything, the trade-through rule is one of several unpopular features of the NYSE (another being its human "specialist" system, almost unique in the western world now, in which real people actually conduct the auctions described above on a trading floor).

This unpopularity is part of the reason why the NYSE has been antsy lately about the growing draw NASDAQ seems to be exercising in the equity market. But instead of changing their own rules to conform to what traders seem to want, the NYSE has found it easier to goad a compliant SEC into making the unpopular rule the law of the land.

Despite the polemical tone of the description above, the Cranky Economist is actually agnostic about the merits of the trade-through rule per se. Perhaps brokers really do find it useful. In which case, we would expect to see them taking their business to the NYSE trading floor. But that's just the point -- we should let the market decide this one.

A shorter trade post

2005-04-06T11:55:00.000-04:00

The Cranky Economist feels especially prolific today, having churned out the inordinately lengthy posts below. So before I head to lunch, I will just leave you with a brief comment on a trade story that caught my eye today.

India is upset with European non-tariff trade barriers. Good for them. This is an important issue, and highlights a trading sin the Europeans have been getting away with for too long.

Tariffs and other obviously craven barriers to the international flow of goods are increasingly passe in this WTO world. What's a protectionist to do? Construct an elaborate network of regulations under the guise of "consumer protection" in order to keep foreign goods out.

One obvious example of how the Europeans love doing this is the persistent angst over genetically modified (GM) food. Genetic modifications to enhance disease- and pest resistance and increase agricultural production are the best hope for many third-world farmers to start lifting themselves out of poverty. Just remember the miracles that hardier strains of rice worked on the Indian economy decades ago. GM food is safe -- try as they might, opponents have been able to produce not a shred of evidence that GM food is a health risk, and we have been consuming it for years in America. But in Europe, an alliance of eco-apocalypticists, farmers and cynical politicians has succeeded in blocking the import of GM food. Publicly they argue that they are "protecting consumers." But since there is no evidence that there's anything for the consumers to be protected from, it seems much more likely that they are actually protecting domestic European producers.

So kudos to India's commerce and industry minister for calling Germany's economics and labor minister on the issue. It's about time Europe stopped using sham safety concerns to impoverish the developing world.

No option but to comply

2005-04-06T11:30:00.000-04:00

That's the situation in which IBM and other tech companies now find themselves as they begin to expense stock-option compensation plans.

Yeah, the Cranky Economist knows we've all been down this road before, and have spent many sleepless nights pondering whether we should or shouldn't expense these options. But I wasn't blogging then. So I'll take this opportunity to throw in my two cents on why this expensing rule is a bad idea.

There are two reasons. First, it's not clear that these options are really an expense. Second, it's crystal clear that it is impossible to assign a meaningful value to them.

Why are they not an "expense"? Take a step back and consider what an option is. For those of you not in the know, it is a contract that gives the holder the right to trade a stock at a particular price (called the "strike price") at a particular time. (The options under discussion are "calls" that let the bearer buy the stock; a "put" lets you sell it.) Call options can be a veritable gold mine if the strike price is less than the market price (the "spot price") on the day the option is exercised. You buy the stock at the cheap strike price, and turn around a sell it for the higher spot price.

But how is this an "expense"? It's not a cash outlay on the part of the company in the way that a salary or benefits are. The contracts are most often fulfilled by creating equity on demand as employees opt to cash out their options (most options can be exercised at any time before expiration) -- that is, it just prints up more stocks that it then sells at the strike price instead of the spot price. So the "cost" to the company is that it is selling a portion of this equity at below-market price. But is that truly an "expense"? The company still gets some cash for its equity, even if it gets less cash than it would on the market.

Certainly nothing in life is free -- these options are an "expense" for someone. That someone is existing shareholders, who find their equity stake (and thus their earnings per share) diluted by the creation of extra equity to fulfill these contracts. Which is why information about options-based compensation has always been included in financial reports, even if it has not been included in profit and loss calculations.

One reason it isn't included in those calculations is the second objection I noted above: It is difficult, if not impossible, to value options in any meaningful way. The value to the employee is obviously the difference between the strike price and the stock price on the day the option is exercised. But how do you guess today what that value will be at some indeterminate point in the future? In markets for traded options, traders can guess (but only guess) at the value of options contracts, and the market will generate an average guess that is as good as any. But how can you begin to guess at the value of an option that isn't traded? Any result you come up with will inevitably be arbitrary. Thanks to the new accounting rules corporate guesses will be arbitrary in a uniform way. But a uniform rule requiring every accountant to aver that the earth is flat doesn't lead to any meaningful revelation about the nature of the cosmos.

So, thanks to the public's combination of confusion over, and revulsion at, how options were used at Enron, we are now left with a regulation that, curiously, will bring less transparency and comprehensibility, not more, to corporate balance sheets. Well done.

How big should Fannie and Freddie be?

2005-04-06T10:30:00.000-04:00

Not as big as they are, says Alan Greenspan. In testimony to the Senate Banking Committee today, the Fed chairman argued that increased regulation isn't enough -- Fannie and Freddie are dangerous not just because they're sloppy or corrupt, but because they're enormous. The only solution is to force them to reduce the size of the investment portfolios they hold.

Now, Greenspan didn't utter the "p" word, so you can't discern any particular attitude towards privatization from his remarks. And some might argue that his emphasis on better regulation implies that he thinks Fannie and Freddie should continue operating under their congressional charters.

But clearly he is deeply skeptical about their current business models, and in particular about their argument that holding any sort of portfolio in their own mortgage-backed securities is beneficial for mortgage markets:

A recent study by Federal Reserve Board staff found no link between the size of the GSE portfolios and mortgages rates. The past year provides yet more evidence, with GSE portfolios not growing and mortgage spreads, as well as the spread between yields on GSE debentures and Treasury securities, declining further. Indeed, while GSE stock prices have fallen substantially and turmoil has continued at the GSEs, mortgage markets have functioned well.

As far as we can tell, GSE mortgage securitization, in contrast to the GSE's portfolio holdings, is the key ingredient to maintaining and enhancing the benefits of the GSEs to homebuyers and secondary mortgage markets.

Translation: If Fannie and Freddie had just stuck to doing what they were originally intended to do, we wouldn't be here today.

The other notable aspect of this testimony is Greenspan's emphasis on the importance of giving the GSEs' regulator receivership powers. Even though investors and creditors assume it would never happen, there is some legal provision for GSE insolvency. However, those rules are weak and vague. The crux is that currently the Office of Federal Housing Enterprise Oversight (OFHEO) would only exercise conservatorship powers. A conservator can only step in to freeze everything in an insolvent company until things settle down a bit. But for a while now, OFHEO has been asking for receivership powers, which would give it the ability to actually liquidate a GSE if it ran into trouble.

Granting receivership power to OFHEO is viewed as an important move in many circles, although its precise effects are still hotly debated. The most compelling arguments in favor (all of which the Cranky Economist buys, to one degree or another) say that the move would telegraph to the markets that Congress really is willing to contemplate allowing one of the GSEs to go under in an orderly fashion. This message would countervail the "implicit subsidy" markets think is there right now, and might lead to more market discpline of the two enterprises, thus reducing the risk that OFHEO would ever need to use its receivership powers. Particular if the move came as part of a larger legislative effort to clarify exactly how one of the enterprises would be allowed to fail if they ran into trouble, it could introduce more certainty into the marketplace, and we could all sleep better at night.

The main argument against is that, by tinkering with the "implicit subsidy," granting receivership would only make the markets more skittish precisely because it would be evidence that the Congress was contemplating the failure of either or both of the GSEs. This doesn't make a lot of sense to me. The markets ought to be skittish already -- recent accounting woes have provided ample proof that the GSEs may be on shakier ground than anyone appreciates. And that "implicit subsidy" is just that: implied. Although investors assume the government would do something to bail them out of their irresponsible investments, no one knows precisely what. Creating receivership powers would create more certainty, always a good thing in financial markets.

So those are the big Greenspan stories. He favors forcing Fannie and Freddie to reduce their internal investment portfolios. And, just as significantly, he favors granting OFHEO receivership. Not bad for a morning's work.

Gird yourselves...

2005-04-06T09:50:00.000-04:00

...for a proxy fight. MCI has yet again jilted Qwest in favor of a match with Verizon.

The Cranky Economist is on the record saying I think this is probably a wise move on the part of MCI's board, if you happen to care about the long-term prospects for creating a stable, competitive company. But will the results of a proxy fight (in which Qwest tries to bypass the MCI board by taking its case directly to the shareholders) reflect that judgment? Hard to say. When Qwest is offering you a lot more cash for your MCI shares, it's not hard to imagine how you might start taking more interest in the short term than in the distant future.

Regardless, it's sure to be the entertaining business story of the spring.

Greenspan on gas

2005-04-05T14:30:00.000-04:00

Alan Greenspan gave a speech today on the current energy market. And while the media reports I've seen so far have played up the more negative aspect of his remarks, overall he seems fairly upbeat (at least, as upbeat as an economist can be).

The money quote comes right at the end:

We are unable to judge with certainty how technological possibilities will play out in the future, but we can say with some assurance that developments in energy markets will remain central in determining the longer-run health of our nation's economy. The experience of the past fifty years--and indeed much longer than that--affirms that market forces play the key role in conserving scarce energy resources, directing those resources to their most highly valued uses. Adequate productive capacity, of course, is driven also by nonmarket and policy considerations.

To be sure, energy issues present policymakers and citizens with difficult decisions and tradeoffs to make outside the market process. But those concerns, one hopes, will be addressed in a manner that, to the greatest extent possible, does not distort or stifle the meaningful functioning of our markets. We must remember that the same price signals that are so critical for balancing energy supply and demand in the short run also signal profit opportunities for long-term supply expansion. Moreover, they stimulate the research and development that will unlock new approaches to energy production and use that we can now only scarcely envision.

Which means that, as painful as high oil prices may be in the short term, we should not believe that the age of $50 oil is a harbinger of economic armageddon.

I smell a statistical rat

2005-04-05T10:45:00.000-04:00

From the AP (via Yahoo! News), word that "community activists" are suing Citibank and Bank of America for discriminatory lending practices. The banks allegedly charge higher mortgage rates to blacks and Hispanics than they do to whites.

The banks' defense is that the plaintiffs' statistics aren't telling the whole truth. And this is quite probably true. I have actually spent about a half hour hunting around for the original data set on which these charges are based. And as far as I can tell, it doesn't include relevant non-race information that might be useful in determining whether racial discrimination was really at work here. Among its omissions are the FICO credit scores and data on debt-to-income rations that the Citi spokesman cites in the AP article.

The plaintiffs certainly don't seem bothered by this shortcoming. On its website, the Inner City Press describes in broad strokes its method for conducting its analysis. Not a single mention of potential "mitigating factors."

Which is truly unfortunate. It is certainly worth considering the causes of any racial disparities in home ownership (assuming such disparities exist). After all, for most families a home is the single largest asset, and home ownership is still, as it always has been, a vital step up the socio-economic ladder. So if minorities aren't enjoying equal access in the housing market, it's a potentially large problem.

But if it turns out that the disparities in mortgage rates suggested here are a result not of bankerly racism but of widespread credit-rating problems, what good is suing the banks going to do? Wouldn't it be more effective to focus on better financial education in the schools, to teach people how to manage credit wisely enough to earn a credit score that will qualify for low mortgage rates?

As I say, I have no idea whether there truly is a problem, and, if so, what is causing it. But my suspicion is that this lawsuit is barking up the wrong tree, no matter how many headlines it grabs.

Talk is cheap...

2005-04-05T10:10:00.000-04:00

...but airplanes aren't. Which is how the U.S. and EU come to be locked in a trade dispute over subsidies to aircraft makers Boeing and Airbus. Although the two sides had cut off negotiations over the dispute a few weeks ago, Reuters reports that the two parties now appear willing to come back to the table.

The Cranky Economist will just take this opportunity to point out that even though both companies do indeed receive various forms of government support, Airbus is far and away the bigger culprit here. Boeing's "subsidy" comes mainly in the form of government contracts that pay (at least in theory) for services rendered and equipment provided. Airbus, on the other hand, enjoys favorable borrowing rights and other forms of direct aid to its commercial aircraft business, money that buys nothing more than continental pride.

Good morning, Fannie Mae!

2005-04-05T09:40:00.000-04:00

Is it just me, or did I just blog about Fannie Mae late yesterday? I did. But the Cranky Bad News just keeps rolling in. At least, it's bad news if you're a coddled GSE executive who's used to ruling your roost with nary a contrary word from anyone else.

MarketWatch reports that later today the chairman of the House subcommittee with jurisdiction over Fannie and Freddie will introduce legislation tightening regulation on the two GSEs. (I'll be keeping my Cranky Eyes open for the actual text of the legislation once it becomes available.) This move comes as the subcommittee prepares for yet another GSE hearing set for tomorrow.

Of course, in a perfect world they would be talking about privatizing the mortgage companies instead of regulating them more heavily. Then again, if bears were bees and bees were bears, we wouldn't have to climb up all these stairs (quoth Milne). Since privatization isn't likely to happen any time soon, we should take what we can get. And that happens to come in the form of tighter regulation.

Tough call at MCI

2005-04-04T15:22:00.000-04:00

Be glad you're not an MCI board member.

First, Qwest ups its ante, and shows that it has the cash to back up its bid.

Then, Verizon warns that it won't up its bid again if MCI accepts Qwest's latest offer.

Should MCI go with Verizon? Probably. Will they? Your Cranky Guess is as good as mine.

No rest for the weary...

2005-04-04T14:50:00.000-04:00

...Fannie Mae investigator. Just when you thought it couldn't get any worse for the government-sponsored housing enterprise, we discover that regulators have stumbled across even more potential accounting irregularities.

Some of the emerging details on this story suggest that it could get really rocky (and the Street is taking the hint; Fannie's price is down around 5 percent just today). It appears that Fannie created several of a certain type of "subsidiary" business entity to issue and sell the mortgage-backed securities that form the core of the GSE's business model. It could then use a particular section of the accounting rules to define these "subsidiaries" in such a way that their assets and liabilities would be kept off Fannie's books. This raises the specter of a potentially enormous problem:

Fannie's core business is (supposed to be) buying mortgages from banks and then bundling those mortgages into securities (mortgage-backed securities, or MBSs) that can be traded on the market. This is a risky sort of asset, however -- it disappears as soon as the underlying mortgage is paid off. And a unique feature of the American mortgage market is that homeowners can pre-pay the principal with no penalty. (This is most likely to be a big problem in periods when interest rates are low, leading many homeowners to refinance.) So Fannie, or the Fannie "subsidiary" issuing the MBS, also sells a form of "insurance policy" to the MBS purchasers, guaranteeing a certain minimum return on the investment.

What that means is that Fannie, through the operation of these trusts, was prone to significant interest-rate risk. How much risk? We'll have to see how that was accounted for (or even if it was accounted for in one place). There are ways to create sophisticated portfolios of derivatives to hedge against these risks (in fact, the structure of other hedge portfolios led to an earlier round of embarrassing accounting revelations for Fannie).

Which leads to this list of some things to look for in the news reports in coming days:

First, how effectively were these units hedged? Strikes me as a reasonable question, since, if Fannie was so eager to keep these trusts off the books, one wonders how aggressive they were about going through the trouble to hedge.

Second, how were those hedge positions accounted for? A very interesting question, given Fannie's apparent predilection for sloppy hedge accounting.

All of which matters because it is precisely this interest rate risk that would tip Fannie (or Freddie, for that matter) over the edge into collapse.

My Cranky Prediction: We haven't seen nearly the end of this story yet.

"GM" is for "good management"?

2005-04-04T14:04:00.000-04:00

Since I've been keeping a quarter of an eye on General Motors lately, I would be crankily remiss if I neglected to mention today's management shake-up at the struggling automaker (from Reuters).

However, I'm no expert on the world of making and marketing horseless carriages, so I will leave it to others to speculate on whether this move will succeed in bringing GM back from the brink of junk bond-dom, or whether it is merely re-arranging deck chairs on the Titanic.

Perhaps this post will generate the third-ever comment on this blog from someone I don't know?

What European economy?

2005-04-04T07:35:00.000-04:00

Yes, there is a European economy. And according to this AP article (via BusinessWeek), it's not doing so well at the moment. The latest forecast is for continuing abysmal growth rates.

The interesting thing about this report is all the excuse-making. From afar, it's pretty obvious that labor-market rigidities, high taxes and only sporadic commitment to internal market liberalization (for example, there is still not a single EU market for banking services) are all to blame for the EU's stagnating growth. And, in their more honest moments, the Europeans themselves might admit this is true. Just witness the latest commotion in Germany about labor market reform there.

However, the most popular scapegoat at the moment is the Euro-dollar exchange rate. Now, they're getting hammered. One of the Cranky Relatives is involved in a European venture that exports to the U.S., and it's important not to underestimate the amount of damage that the weak dollar is doing to these businesses (a weak dollar discourages Americans from importing by making foreign goods seem relatively more expensive).

At the same time, the American economy has always weathered a strong dollar remarkably well. In fact, the American economy seems to be able to thrive regardless of the relative value of the currency (or at least, has been doing just fine lately; what would happen if the greenback continues to slide is another matter). That experience suggests that the European pain in the face of a strengthening currency is symptomatic of other problems.

The big one that presents itself is weak domestic (meaning, inside the euro-zone) demand. The U.S. has been enjoying improved competitiveness of its exports on the world market thanks to the weaker dollar, but back in the halcyon days of dollar strength, we could rely on enormous domestic demand to power the economy. It was the compound effect of years of economic flexibility and growth that created an economy large enough and strong enough to fuel its own growth.

But Europe is almost completely dependent on foreign demand? Even with all its hundreds of millions of inhabitants it can't sustain itself through a period of euro strength?

The point of which is that there's more to this story than meets the eye.

Sex

2005-04-04T07:03:00.000-04:00

No, silly. This is a family blog. Although that cheap old headlining trick has gotten your attention.

Of course, even if this is a family blog, you have access to plenty of smut on your television, at least if you believe Alaska senator and nominal Republican Ted Stevens, chairman of the Commerce Committee. Be not afraid (of filth on TV), however. The senator might be willing to do something about it.

The real question is, what is it that's offending us? Setting aside for the moment aberrations like Janet's "wardrobe malfunction" (what a terrific phrase!) or the flap over that "Desperate Housewives" NFL ad, my Cranky Sense is that TV, even on cable, is already pretty clean. Sure, there's plenty of late-night filth on HBO and Cinemax, but that comes at a time when the children of parents responsible enough to use blocking technologies will be in bed already anyway.

So what, precisely, are we trying to clean up? If Congress succeeds in raising the limits on indecency fines, we'll discover that Janet Jackson will start conducting more careful interviews for prospective costume designers. Can we ask for anything more?

And how much will any new solution cost? Because we'll pay for it in higher cable and satellite bills.

First SAL of April

2005-04-02T07:45:00.000-05:00

Good morning, all. After a hectic day yesterday, I only posted once. But fear not, I'm back today with your weekly dose of Saturday Assets and Liabilities, and will resume a normal blogging schedule on Monday.

Assets

The Pope. As his health fades rapidly this weekend, thoughts are already turning to the legacy of his pontificate. Just look at this representative article from the Washington Post. The most important paragraph runs thusly:

The Polish-born John Paul came to the papacy at the height of the Cold War in 1978 and presided during the West's triumphant defeat of communism. At the same time he emerged as a tough critic of global capitalism and defender of the poor, reaching out to the Third World far beyond any previous prelate. He drew large and often emotional crowds during his many tours in Latin America, Asia and Africa. He also opened dialogues with other religions.

He understood that the tyranny of Communism was not the way to help the poor. And he understood that tyranny was inherent in Communism itself, that it wasn't just a Soviet aberration (an understanding that led him to quash pro-Marxist "liberation theology" in Latin America). But at the same time, he recognized that, even if capitalist free markets were the best hope, they could only work if the participants were mindful of a higher authority. As I interpret them, his pronouncements "against" capitalism were not against the system itself. Rather, he preached against idolatry, against transforming free markets themselves into a god and then clinging to belief in them as an excuse for ignoring the poor.

A good point, that, and an important reminder for all of us who can sometimes let our respect for, and fascination with, markets lead us to forget that there are people behind the numbers.

Liabilities

Goldman Sachs. A GS analyst on Thursday sent oil prices skyrocketing after issuing a report in which the analyst speculated that oil prices could hit $105 in the not-so-distant future. This even as prices had been falling somewhat in the few days leading up to the announcement. Several things seem odd about this story. First, that $105 is so much larger than any other estimates currently floating around. Meanwhile, as one competing analyst opines in both these MarketWatch articles, GS's large oil derivatives positions might have, er, influenced what sorts of assumptions they might have used to reach certain conclusions. It's impossible to say whether there's any odor about this, but it certainly does seem strange.

News from that other housing GSE

2005-04-01T07:50:00.000-05:00

The Cranky Economist has been fascinated by management woes at Fannie Mae for months now. Not only is it a captivating business story, but it's a classic Washington scandal-in-the-making, too. It's all there -- dodgy accounting, fat-cat executives, political connections. Who could ask for more?

But there is another housing GSE (government-sponsored enterprise) that has had a scandal of its own. In 2002, Freddie Mac announced that, thanks to antiquated accounting procedures, it wasn't sure exactly what its earnings were. This was a much more boring scandal, since it seemed to stem more from incompetence than from crass criminality tinged with venality. And in this town, incompetence isn't exactly a rare commodity.

All of which serves as a prelude to the news (from AP via Yahoo! News) that Freddie's 2004 profits took a major hit. A look at exactly why 2004 results were so dismal suggests that the loss could augur well for the future.

Why is that, you ask? Because a lot of the drop in profits arises from two factors: Increasing capital reserves to acceptable levels, and, less significantly, putting the finishing touches on a brand-spanking-new accounting system that will soon allow Freddie to file statements on time for the first time in three years. This, in the GSE world, is what passes for progress.

The long and the short of it is that Freddie appears to be cleaning up its act, and will probably return to some semblance of normalcy towards the end of calendar 2005. Which I suppose is good news. In a perfect world, Fannie and Freddie would both be privatized. But in the meantime, it's not unreasonable to hope that they would behave themselves like real, responsible companies. Freddie, at least, seems to be trying.

An international institution you can like

2005-03-31T18:00:00.000-05:00

The UN? NATO? The IMF? No, all of these have their problems, sometimes big ones, sometime small ones. But the WTO is A-OK in my book. Why? Because it is forcing the U.S. to accept free trade, whether we want to or not.

Most recently, today the EU and Canada announced that they will take advantage of the WTO's blessing to impose tariffs on some American exports (from MarketWatch). They are miffed over the so-called Byrd Amendment, a rule that in theory protects American companies from the effects of dumping but in practice seems to subsidize industries that just don't like foreign competition.

"Dumping" describes the practice of exporting a good to a market for sale at an unjustifiably low price. "Unjustifiably low" generally means "below the cost of producing the good." It is most often the result of subsidies to the producing industry in the exporting country, and since theoretically subsidies are bad, international trade agreements allow for anti-dumping rules, which most often take the form of a tariff on the offending goods. The Byrd Amendment allows affected companies (in practice, any company that complains loudly enough) to take a piece of the import-tariff pie collected as part of an anti-dumping policy.

So what's the problem? Dumping can be devilishly difficult to spot. Just look at aircraft manufacturers, subsidized to one degree or another by both the U.S. and the EU. Which is why this industry is not the subject of this current trade dispute. In the present case, the U.S. claimed there was dumping, while the WTO found there was not.

Which is probably true. And in fact, Bush has been trying to get the Byrd Amendment repealed for three years now, facing defeat each times at the hands of a Congress overly fond of pork. We can only hope the threat of these new tariffs will encourage Congress to keep kosher.

Tag, you're IT?

2005-03-31T17:18:00.000-05:00

Just when you thought you were done digesting the latest round of GDP figures, InformationWeek chimes in with this interesting nugget: Growth in IT spending represented a not-insignificant component of overall GDP growth at the end of 2004.

This is a particularly interesting development for several reasons. Most obviously, increased business investment signals increased business confidence. If companies are starting to spend more vigorously on technological improvements, it means they are growing more optimistic about economic conditions down the road.

But it is also interesting because, if this trend continues, it signals that the economy has finally absorbed the massive wave of technological investment companies made in the late 1990s. The investment boom that fueled tech stock prices and built lovely mansions in Silicon Valley sowed the seeds of its own destruction in that the computers got bought faster than the buyers could figure out what to do with them. We've heard so much the past few years about rapidly increasing productivity, and this is part of the explanation -- it took a few years to harness those investments.

Now, however, businesses seem to be deciding that they've gotten as much as they can out of the technologies they have, and that now it might be time to buy more. All around a good sign.

MCI hotting up

2005-03-31T17:12:00.000-05:00

First off, thanks to all you FOCEs for your patience during today's posting drought. I took a Cranky "Personal Day" this morning, and a Cranky Nap this afternoon. Now to make up for lost time:

Big news today on the continuing MCI saga. Yesterday it looked like there was a chance Qwest would not go gently in that good night of failed buyout attempts. Now we know for certain (Reuters via CNN).

And to judge by the analyst and investor quotes in that article, Qwest might just win (assuming it can mount its expensive proxy fight, in which it would bypass MCI's managers and go directly to shareholders for a vote on its merger proposal).

Even if, as I wrote yesterday, I'm skeptical about the virtues of a Qwest bid in the long term, it's not so surprising that the shareholders would jump at it. It is, after all, a big boon for them.

Be that as it may, the real significance of this story lies in its suggestion that we could be in for some entertaining telecom news as spring progresses.

Up, up and away?

2005-03-30T16:30:00.000-05:00

Is that where earnings and stock prices are headed for the legacy airlines that have been struggling so badly over the past four years? You might almost start to think so after reading this brief item on MarketWatch.

As has become all too well known by now, the big boys on the tarmac have been suffering. The post-September 11 economic downturn cut into expensive business travel on which the airlines had come to rely for profits. Meanwhile, a rabbit-like proliferation of low-cost carriers (led by Southwest and, now, JetBlue) drove down fares in steerage class. All of which would have been bad enough even without the airlines' hugely expensive and economically outdated labor contracts.

Blue skies might be ahead now, however. Or might they not be? It's hard to tell. On the one hand, the airlines have been moderately successful in reducing their labor costs (two of them -- United and US Airways -- have been aided by bankruptcy court judges). But I have to wonder: In the past week, we also saw news that travel is picking up to pre-September 11 levels for the first time since the terrorist attacks. And there are signs that business travel is also increasing, and that corporate travel offices are more willing now than before to spring for more expensive seats.

The point being that only the next downturn will tell whether this round of cost-cutting "took." The pattern in the past has been for the airlines to panic during an economic downturn, and then wring their hands just long enough for the market to improve, letting them off the hook again. This has allowed them to perpetuate what seems in many ways to be an unsustainable business model. Only time will tell whether we see yet another wave of airline bankruptcies come the next down cycle in the wider economy.

I surrender: An MCI post

2005-03-30T11:15:00.000-05:00

OK, I give up. No, I haven't been drinking French wine or eating French cheese. Out of sheer contrariness, I'd been steadfastly refusing to write about the war that's currently raging over the hearts and minds of MCI's directors and shareholders. And sure enough, it looked the the story was over when MCI agreed to accept Verizon's offer instead of a higher bid from Qwest.

But never fear, the saga isn't over yet. Qwest may not be quite ready to give up the ghost (so says AP, via Forbes.com).

If you haven't followed it closely, this story may seem rather odd. Qwest has consisently been making better offers to MCI's shareholders. So why are they willing to go to Verizon? Because even if, over the short term, Verizon's offers have been less appealing, over the long term the Bell grandkid offers the best shot for MCI. Its balance sheet is much healthier than Qwest's. It is already a major player in the wireless market (remember, MCI's efforts to emerge from the WorldCom fiasco have been hampered by the fact that it doesn't offer a wireless product in a marketplace where free national calling plans on cell phones are significantly eroding the business of traditional MCI-esque long distance companies). And, whereas Qwest's major national presence is a fiber-optic network that is already under fierce competitive pressure, Verizon doesn't have quite the same type of problem.

Which all matters to MCI shareholders because any deal is going to involve them receiving stock in the acquiring company. That stock is much more likely to be worth something down the road if it's Verizon stock instead of Qwest's. Thus, it is possible for what looks like an inferior offer on paper at this moment to be a better deal in the long term.

If I owned MCI stock, I would be hoping for the Verizon deal to go through. But then, I don't own MCI stock. So I will just happily continue to speculate with other people's money.

Justice may be blind...

2005-03-30T10:40:00.000-05:00

...but is it deaf? Seems not. At least, David Souter knows what an iPod is. This was one of the big revelations in yesterday's oral arguments in MGM v. Grokster, which will decide the fate of peer-to-peer (P2P) Internet file-sharing.

The Cranky Economist may or may not have ever downloaded lots and lots of songs illegally via Napster and Kazaa, thus contributing to the bandwidth crowding on his college network when he was in school. I'll plead the Fifth. Although for the record, if I were to have done such a terrible thing, I would have disabled file-sharing from my own computer, thus welching off other people's music libraries while contributing nary an obnoxious European house dance song to the ether myself, thus incurring the wrath of European house DJs and my fellow alleged illegal file-downloaders alike. But this is all mere speculation.

The real problem is that I find myself siding with the recording industry on this one. When all is said and done, the songs are still copyrighted. And as someone whose day job is in the publishing world, I can attest to how important copyright is. Grokster's claim that there are many legitimate uses for its product would be slightly more credible if the whole online edifice weren't marketed quite so explicitly as a vehicle for illegally downloading copyrighted materials. Although some economists are still debating the extent of the economic damage the P2P phenomenon has caused to the record labels, at the end of the day that's irrelevant. The law is the law.

Ironically, I think the recording industry and the artists are in trouble whatever the outcome of this case. If they lose, they will continue to lose sales to online downloads. You just can't compete with free, especially when your product is so darn expensive. But if they win, I'm willing to bet that sales continue slipping. With so many more outlets for entertainment spending, high CD prices are just not a sustainable business model. For the past couple years, the labels have been able to blame competition from Napster, Kazaa and Grokster for their poor results. If the Supreme Court rules against the P2P networks, that crutch will disappear. Obscenely overpaid artists might find the value of their contracts slipping to slightly more reasonable levels. Will they be in the poor house? Probably not. But they may need to turn to starring in frivolous MTV reality shows to make the spare change to support their lavish lifestyles.

Letting the Wolf in

2005-03-30T10:00:00.000-05:00

It's official: Wolfowitz is cleared to become the new president of the World Bank (from the FT).

Canadian network CTV suggests in their report that his "neo-conservatism" was an issue. (I'll use the quotation marks because I'm not convinced that CTV, or anyone else, really knows what that word means.) But at the end of the day, the Europeans either saw the light and realized that Wolfowitz would be great for the job, or they realized that fighting would be futile and surrendered. Take your pick.

The Cranky Economist, for his part, is relieved to see that the nomination will be approved. Wolfowitz strikes me as just what the World Bank needs.

"GM" is for "good morning"

2005-03-30T09:20:00.000-05:00

And what better way for a true-blue FOCE to start his or her day than by reading a post about your favorite struggling Detroit automaker and mine.

The latest news to be had from Reuters via Yahoo! is that GM is mulling the sale of the commercial mortgage business in its GMAC lending subsidiary.

I admit it -- the Cranky Economist's first instict was to think, "Hey now. It's profitable. So why are you selling it?" At first blush this deal struck me as a bad idea. But now I'm coming around. After all, what business does an auto manufacturer have sticking its thumb in the mortgage-lending pie to begin with? Better to try to scrounge up a little capital (and that $1 billion, while not insignificant, is only "a little capital" when you compare it to the rest of GM's balance sheet) by selling off a successful but distracting asset.

So the Cranky Economist is officially agnostic on the question. Que Sierra, Sierra, they say as they drive their GMC SUVs. But I figured it was worth mentioning anyway, since I've been following GM's travails somewhat over the past week.

It's hard to be an oligarch in Russia

2005-03-29T16:05:00.000-05:00

That, at least, must be what Mikhail Khodorkovsky is thinking these days, as his trial for tax fraud and other nasty crimes winds down. Just check out this AP report (via BusinessWeek): During closing arguments, the prosecutor asked for the maximum 10-year sentence.

As the Cranky Economist has said before, it's not a matter of whether Khodorkovsky is completely innocent. Chances are he's not. But by the same token, surely the Russian justice system is in trouble when the only criminals who happen to get prosecuted are the ones who happen to be contributing to Vladimir Putin's electoral opponents.

Who's suffering? As the AP article suggests, the Russian people. This transparently political case has scared off many investors and roiled the Russian oil sector just at a time when record crude prices should be boosting the economy. "Justice" evidently doesn't come cheap.

It was good while it lasted

2005-03-29T13:30:00.000-05:00

It's been an exciting week for Blockbuster. First came news that it was dropping its bid for Hollywood Video. Now, as Reuters reports, it's been spanked by six state attorneys-general over its bizarre "no late fee" program.

Since the Cranky Economist isn't a Cranky Lawyer, I'll leave it to others to debate the relative merits of the legal case against Blockbuster. Instead, I'll just point out that it was a really bizarre tack from a business standpoint. Blockbuster has been under pressure from the simple, low-cost options now available to consumers in the form of Netflix and its ilk. To which Blockbuster responded by what -- simplifying its rental program? Oh no. It merely tried to put some very complicated (and, it would seem, deceptive) lipstick on its old-fashioned-business-model pig. The result being a mass of confused, angry and overcharged consumers who are probably even more willing now to try another rental chain or Netflix than they were before.

The main point being that just because we Cranky Economists like big corporations doesn't necessarily mean that we think they're very smart all the time.

Sony's knavery

2005-03-29T06:30:00.002-05:00

The headlines look really bad. But don't be fooled. As Reuters reports, Sony may have been ordered to stop selling its spectacularly popular PlayStation2 as a penalty for patent infringement, but thanks to injunctions and eventual royalty payments the likelihood that the consoles will ever disappear from the shelves is practically nil. Hence, practically no effect from the ruling on Sony stock.

The main thing that strikes me about this case is how foolish it was to not just work out a royalty deal in the first place. It wasn't like Immersion was a competitor in the video-game-console trade. What was Sony thinking?

What's a court to do?

2005-03-29T06:30:00.001-05:00

Alright, I admit it: The Cranky Economist is flummoxed by this one, from PC World. Now that hunting season for that rare beast emergingus consensae is over, the Supreme Court will turn its creative eyes to telecom regulation. The FCC, with support from the Bush administration, has ruled that cable internet services are not subject to telephone-line regulations that require the owners of phone lines to share the lines with their competitors. That means that if Comcast, in its great wisdom, should wire up my Cranky Neighborhood for Cranky Cable Broadband, Comcast would maintain the right to a monopoly on that line.

The problem is that there are compelling arguments on each side. There's an obvious case for striking down the original FCC decision, thus allowing multiple ISPs to compete on the lines. It would drive down prices for the service by creating a competitive marketplace. And my instincts run strongly against the idea of government sponsoring a monopoly in anything.

And yet. The administration might be on to something when it argues that the lines will never be run if the cable companies can't be sure they'll reap some rewards from their efforts. America is behind the curve when it comes to running broadband to businesses and households, and that process will only get slower if there's an uncertain return on the investment.

Do I have an opinion? Of course. Just not a very forceful one. For now, I'm going with my gut and saying that we should allow competition over these lines. But I'm open to suggestions. Comments, anyone?

BK's bravery

2005-03-29T06:30:00.000-05:00

Remember that post yesterday about Burger King's Enormous Omelet Sandwich? In case you don't, the gist was that the Cranky Economist praised BK for introducing a disgustingly fatty and caloric new product even as the trial lawyers are aiming their cannons at the fast-food restaurants in soon-to-come obesity lawsuits.

Further proofs of just how brave BK is comes in the form of this cereal lawsuit, reported by AP via ABC "Fake GOP Talking Points" News.

Hope for Netflix?

2005-03-28T16:30:00.000-05:00

The Cranky Economist particularly enjoyed the upper-level course in financial economics he took during his senior year at a certain Cranky College. One of the many virtues of this course was that it first introduced me to Netflix, the increasingly popular DVD-rental-by-mail service. Although I didn't subscribe to Netflix until more than a year after taking the final for the class, the past two and a half months have been the happiest in my movie-renting life.

Its trove of indie and foreign titles, however, was not why Netflix was a topic of discussion in a class about financial markets. Its stock price was. When it first went public, Netflix's price had skyrocketed for a while. This was a source of puzzlement to my professor, who predicted -- correctly -- that Netflix would come under increasing competitive pressure from new entrants to the mail-rental biz like Blockbuster, and from new entrants to the broader movies-at-home biz, like on-demand movies from satellite and digital cable. Meanwhile, it seemed like an odd business model: It can't afford for its customers to use it too much; in fact, its ideal consumer would be one who subscribes and then hardly ever returns movies, thus saving the shipping costs.

Still, increased competition or no, Netflix seems to be doing alright for itself, having just passed the three million subscriber mark, according to MarketWatch.

Who will win the Netflix Wars? Darned if I know. But it sure ain't dead yet.

When is an ad not an ad?

2005-03-28T16:00:00.000-05:00

When it's on PBS, apparently, at least according to the NYT. Underwriters (PBS-speak for "advertisers") are no longer content with those little slides that used to flash before and after programs, giving the name of the supporter and nothing else. So now, as PBSophiles everywhere will have noticed in the past couple years, these corporate sponsors are allowed to create advertisements. Which seems to be sparking an existential crisis of sorts for the network's executives and devotees.

Of course, there are some rules that PBS advertisers, oh sorry, "underwriters" must follow as they craft their spots. Consider the Chipotle faux pledge drive spot described in the article. Take this example, buried deep in the article:

The Chipotle spots had to toe some very fine lines. For example, the guidelines allow people in the spots to consume a product as long as they do not appear to enjoy it overtly. So the producer instructed the actors in its pledge drive spoof not to look too thrilled.

This invites one observation in particular: It appears that PBS programming really can support advertising. You'll recall that the main justification for getting government in the TV business is that there is a variety of educational program that is worth having but that would not draw a large enough audience to attract advertisers. And yet, this "underwriting" charade has always been a form of advertising. PBS may not be drawing a very large audience, but it is drawing an audience large enough that advertisers, oh sorry, "underwriters" like Chipotle want to produce real ads for it. I chalk it up to the proliferation of niche cable channels, which have demonstrated to advertisers that they can get a big return on their ad money even from buying spots on a network with a narrowly defined audience.

So tell me again, why exactly are we funding PBS?

Putin pushes privatization...

2005-03-28T13:30:00.000-05:00

...perhaps. At least he's making the right noises, according to this AP article (via BusinessWeek). It seems he is now willing to call it a day on the paroxysm of corporate prosecutions that have been convulsing the Russian business world for the past couple years.

If he's serious, this would be a positive development. As the Cranky Economist has noted before, there were plenty of problems with the way Soviet-era industries were privatized in the early and mid 1990s, and there was more than enough criminality to go around. At the same time, I'm not sure I see what's to be gained by going back and trying to prosecute now crimes the government was happy to abet then. Of all of the things that can and should be done to reform Russia's, er, problematic business climate, I'm not convinced this Spitzer-esque indicting spree was the best option. Could it be Putin has finally realized this?

As an optimist, I'd like to think so. But before you direct me to the bridge link, I'll allow for another motive. By now, Putin has been able to indict every oligarch who would be willing and able to threaten his political power -- Mikhail Khodorkovsky of Yukos is the most prominent example. With no other political scalps to hunt down, Putin can certainly afford now to hang up the knife. And win the plaudits of naive young business and economics bloggers while he's at it.

Chinese banking; or, Who says stenography doesn't pay?

2005-03-28T11:50:00.000-05:00

Bad news if you're a corrupt Chinese banking executive: The International Herald Tribune (part of the NYT empire) reports that reforms aimed at improving management at China's state-run banks are on the way.

Corruption is certainly a serious problem. If you read any of the numerous articles out this morning about this reform proposal, you will quickly notice that every paper seems to have its own embezzlement story. (The most intriguing may be MarketWatch's fleeting reference to a typist who allegedly pocketed $6 million; the Cranky Economist is obviously in the wrong line of work.)

But this is only the tip of the iceberg when it comes to problems in China's banking sector. Even if all of the country's bankers were as honest as can be, there would still be trouble. They would still be carrying an unsustainable burden of non-performing loans.

The problem is that for decades now, the state-owned banks have been a vehicle for subsidizing state-owned enterprises. It's a convenient way for the Communist system to pretend that there is some degree of economic accountability for the enterprises. Would that it were so. Instead, the banks are expected to continue pouring ungodly amounts of money into inefficient enterprises, subsidies that go on the books as loans, loans that have virtually no chance of being repaid.

Which in itself would be bad but not dangerous, except for accounting. Loans go on banks' balance sheets as assets, in China as elsewhere. So if the banks write off these bad loans, suddenly their balance sheets would deteriorate significantly. (Western banks have to use cash from current revenues to restore the balance when they write off their bad loans, but the scale of the problem is an order of magnitude larger in China, and will require a lot of money from the government.) So China's banks are already perched precariously on the edge of the precipice. The entry of foreign competition in 2007 (as mandated by the WTO) could well push them over the edge, as they have to compete with efficient and well capitalized external banks.

There's a political element as well. Chinese families have abnormally high savings rates. And most of that savings goes into deposits at the local bank, a bank that is either state-owned itself or intimately linked to a bank that is. If these bad loans force any of the big state-owned banks into insolvency, expect runs (it has already happened several times in recent years, in rural provinces) by Chinese people desperate to reclaim their life savings and angry at the government that has jeopardized the money. Will this be the equivalent of Polish solidarity? It'll be an interesting couple years.

A Whopper of a good idea?

2005-03-28T10:10:00.000-05:00

After the Cranky Economist's successful lamb roast yesterday, this post may involve a shift from the sublime to the ridiculous. But word on the street, via USA Today, is that Burger King is rolling out a new breakfast sandwich. And it's going to be even less healthy than the Whopper.

I have to admit -- I'm not a big fan of Burger King. Or McDonald's. Or most fast food. (Although I do admit to eating at Wendy's once every couple months or so.) It's not that I'm an anti-fast-food fascist. I used to love fast food. It's just that I've grown tired of the heavy feeling you get from that ball of fried food that just sits in your stomach all afternoon. So I choose to grab a tuna sandwich for lunch at a nearby deli.

Let me repeat the key phrase in there: I choose. If other people want to eat fast food, more power to 'em. There are certainly plenty of options out there.

Unfortunately, this is a somewhat uncouth opinion to hold these days. Members of the tort bar are circling the fast-food industry like sharks around an Australian surfer, smelling juicy lawsuits on behalf of overweight, sickly people who chose poorly. So this new BK breakfast sandwich is noteworthy not because it will be tasty but because it will be fattening. If they are willing to roll out such an obviously unhealthy product in the current legal climate, perhaps this suggests that they'll be willing to fight the lawyers in court.

Good news, that. America's business landscape is littered with the skeletons of industries that surrendered, settling in the face of ridiculous lawsuits instead of taking their cases into the public forum that a trial would provide. So I say, bring on the Enormous Omelet Sandwich. It's high time.

Happy Easter

2005-03-27T08:11:00.000-05:00

The Cranky Economist is taking a break from serious posting today in observance of the holiday. I'm roasting a lamb instead. Delicious times. But never fear -- I'll be back tomorrow with your regular menu of economics and business commentary.

In the meantime, a Happy Easter to all you FOCEs!

This Week's SAL

2005-03-26T07:00:00.000-05:00

Welcome to the second Saturday for the Cranky Economist blog. Without further ado, your Saturday Assets and Liabilities (which both happen to come from the New York Times?!):

Assets

President Bush. But for something that probably hasn't registered on your radar screens: Amtrak reform. Although you'd never guess it from the tone of this article, the news here is actually good; Bush might be putting the fear of God in Amtrak's board.

National passenger rail in this country just isn't working. The trains rarely seem to run on time, the automatic ticket machines can be friendlier than the staff, and there's that smell that sticks in your clothes until you launder them. Amtrak claims it could fix all these problems -- and problems we passengers don't see, such as crumbling infrastructure in the heavily traveled Northeast Corridor -- if only the Feds would pony up even more cash than the billions they have poured into Amtrak already. If you believe that, well, here's the bridge link I posted a few days ago.

In reality, the only way to fix Amtrak is to destroy it. There is a need for passenger rail in America, but only in part of it -- the Washington-to-Boston corridor that is already the only profitable line in the system. Unfortunately, rather than funding capital investments to improve service where people actually use the trains, a significant chunk of any additional appropriations will find their way to subsidizing lines that carry no one through the middle of nowhere. Do we really think that a Congressman from Kansas or Texas or Nebraska is going to agree to spend his constituents' tax money to subsidize rail travel for Manhattanites?

So let today's Amtrak go bankrupt, as the President is (at least saying he's) willing to do. When it's sold off for parts, the profitable Northeast Corridor will go to someone who can actually run it efficiently. What would happen to the other parts of the network is an open question. But it's not like there are any riders there to complain.

Liabilities

George Soros. Now, it's impossible to know who's right and who's wrong in the insider-trading case for which Soros' conviction was just upheld. After all, all the players are either French or George Soros. But the case surely does have a certain, how shall we say, odeur about it, so it's not unreasonable to suppose that the court has pegged the Hungarian-turned-Kerrynista just about right. Further proof that politics makes strange bedfellows: I wouldn't have thought the populist MoveOn.org-ers would give the time of day to a corporate criminal. But I guess they're happy to take his ill-gotten gains.

Time to cover your Fannie

2005-03-25T15:55:00.000-05:00

All the cool kids are doing it. Suing Fannie Mae, that is. This latest class-action, quoth MarketWatch, comes from options traders who claim they were misled about the true state of Fannie's balance sheets. Gee, I wonder what could have given them that impression...

The Cranky Economist's mischievious side is tempted to joke that the fraud at least provided some downside risk for what were otherwise shamefully secure "investments." But that isn't really fair. At the end of the day, the rules is the rules, and you gotta play by 'em. Fannie's execs apparently didn't. See you in court.

Calling Putin's bluff

2005-03-25T15:13:00.000-05:00

Remember Mikhail Khodorkovsky? I thought not. He used to be the insanely rich head of Yukos, one of Russia's largest oil companies. Then he started making insanely threatening forays into politics; at least, they looked that way if you happened to be Vladimir Putin. As a result, Khodorkovsky has been insanely imprisoned for tax evasion and other trumped-up charges since October 2003. And just by coincidence, his former company got chopped up and sold off in parts, one of the more profitable of which just happens to have been acquired at an insanely low fire-sale price by a government-owned former competitor. Who would have thought?

Now, however, the AFP reports that Khodorkovsky, with a little help from his friends, is calling Putin's bluff. With the tax bill potentially paid off, what will happen to the government's case? In Russia, anything is possible, so we'll just have to see. But the result will certainly be enlightening as to what kind of game Putin's really playing here.

Incidentally, one should not necessarily be under the impression that Khodorkovsky is an all-around great guy, an innocent Putin victim. He's a member of a class of oligarchs who built personal empires, not to mention tremendous fortunes, by purchasing Soviet government assets during privatization in the 1990s. Were all of these transactions legit? Of course not. Were any of them on the up-and-up? As Katherine Hepburn's Queen Eleanor opines in The Lion in Winter, "in a world in which carpenters get resurrected, anything is possible." So has Khodorkovsky been involved in his fair share of shady dealings in the past decade? Probably. But that's not really the issue. If Putin were truly going after these robber barons, Moscow's prisons would be overflowing with white-collar criminals right now. All signs point to Khodorkovsky's erstwhile political ambitions as his real crime.

Blockbusted

2005-03-25T11:30:00.000-05:00

The merger that wasn't: Yahoo! News carries an AP report that Blockbuster decides Hollywood Video isn't worth the effort.

I'm agnostic on whether, in a perfect world, this would have been a good idea. Perhaps Hollywood really is better off in the hands of Movie Gallery.

The only comment to make here is that the Cranky Economist doesn't quite see why a Blockbuster deal should have elicited reaction from Federal trust-busters. On its face, it's not hard to see why it would have. Blockbuster is the No. 1 in the industry, and Hollywood is No. 2. Together they would have made one enormous rental chain with enormous price-setting power in the bricks-and-mortar rental trade.

Yet, arguably the commodity here isn't DVDs-rented-in-a-bricks-and-mortar-store. The commodity is movies. Actually, the commodity is entertainment. And right now that marketplace is fiercer than it has ever been. First, Blockbuster-Hollywood would have had to compete with new-release movies, sports, books, television programs, the Internet, exotic adventure vacation packages -- you name it -- for entertainment dollars. And even once they had sold us on the idea of watching non-new-release movies, they'd have to convince us to get in our cars to go to their stores to get those movies, instead of watching them on one of the zillions of premium movie channels and on-demand video products now available on cable and satellite, or getting them through the mail via Netflix. The sheer inconvenience factor of the bricks-and-mortar concept should have been enough to control their rapacious gouging.

So I don't quite understand how being the top dog in one particular sector of this vast entertainment marketplace would have helped them very much. Looks to me like another case of possibly overactive anti-trust regulators. (To be clear, there was never a ruling; the two parties pulled the plug before seeking approval, but after getting strong signals that approval would be denied.)

Again, I have no idea what the relative merits of this deal would have been without the threat of regulatory interference. And it's a shame that investors won't get the chance to consider all the options that might have (should have?) been on the table.

Another bubble?

2005-03-25T10:15:00.001-05:00

Good morning, FOCEs ("Friends of the Cranky Economist"). My apologies for the second delayed start in a row. DSL still not working at home. Is a cable broadband connection on the way? We'll see what happens after consultations with the Cranky Roommates.

But although ISPs may come and go, real estate's for ever. Right? The New York Times is apparently thinking maybe that's not the case after all.

So is real estate the new tech stock? Are we in the middle of a bubble?

For starters, let's think about what "bubble" actually means. It doesn't mean just any big run-up in the price of an asset or assets. It means a big, irrational run-up in the price. That is, you only have a bubble when the prices keep going up even though there's no economic rationale for the move. As a theoretical matter, there is some debate among economists about whether "bubbles" even exist. To identify a bubble you have to know what the value should be -- by definition, the bubble price exceeds that rational value. But the dirty secret is that economists have no idea how to determine the "rational value" of just about any asset. Any honest financial economist will tell you, for example, that standard models for calculating the intrinsic value of stocks leave a lot to be desired. So we can't rule out the possibility that what looks like a bubble only appears irrational because our models aren't accounting for all of the reasonable factors that influence asset prices.

So much for the theory. What does this have to do with real estate? Well, there are so many rational reasons that real estate prices should be going up right now that I find it hard to believe we're in a bubble. Herewith just a few I can posit off the top of my head:

Low interest rates: Mortgage rates have been at phenomenal lows in recent years. But everyone realizes that these lows can't last. Is it so surprising, then, that there would be a big rush to buy while the rates are in the bargain basement? This is a classic price-increasing shift in the demand curve.

Rising affluence: Lost tech fortunes aside, the fact is that for decades now there has been a continuous upward trend in income and wealth. It is now more possible for more people to contemplate buying a home than ever before. Given that homeownership is something that American culture prizes, of course we're going to start seeing more buyers in the marketplace. And that's not even mentioning the second-home purchases that this affluence allows.

Migration: As our economy grows less and less agricultural, our society is growing more and more urban. Over time, we've seen a growing exodus off the farm and into the townhouse. One anecdotal piece of evidence comes from my own family, where the value of the Cranky Parents' Cranky Homestead in a medium-sized town (pop. 19,000) situated in a rural area in New England has certainly not benefited from the boom market to the degree that it would were it situated in New York City or Washington. Land may be many things, but portable it isn't. And it's important to note that although in general house prices seem to be rising most places, the rate of increase has been very uneven and seems to depend on the geographic market.

Those tech-stock scars: Even if a debate still rages about whether the tech boom was or wasn't irrational, it was certainly traumatic to investors who lost their shirts buying pieces of paper that were worth millions one day and nada the next. Couple that with an investing environment where corporate scandals and a sluggish economy (at least until recently) make the stock markets seem less enticing and where low interest rates are holding bond yields down, real estate begins to look like a good place to stick your extra cash.

And these are just the factors that popped into my mind without doing any research on the matter.

Does this mean that prices will continue to rise at the rate they've been going? Not at all. Saying that this is a rational market -- and not a bubble -- does not preclude a fall in the price level. Prices fluctuate in rational marketplaces all the time. But it does mean that we shouldn't assume that just because a market is doing something we only partially understand, it must be acting irrationally.

Yes, but will it work?

2005-03-24T16:30:00.000-05:00

It's official: K-Mart's acquisition of Sears, first announced last November, is now a done deal.

But will it really save either struggling retailer?

The theory seems to be that by creating a single WalMart-sized company, the merger will create WalMart-sized economies of scale. And the architect of the deal -- financier Eddie Lampert, who bought K-Mart out of bankruptcy in 2002 -- is viewed as a sort of retailing wunderkind to boot. After all, K-Mart actually posted a profit last year.

Except that, as readers of the above-linked article will discover, there's more to that profit than meets the eye. Most of it comes from selling off some of K-Marts impressive real-estate assets. When it comes to real sales figures -- which you would think would be a good indicator of the health of a retailer -- K-Mart is still very much in trouble.

Meanwhile, the Cranky Economist is left wondering: The economies of scale that have made WalMart and Target so successful are based on the fact that both buy enormous quantities of the same types of goods -- discount merchandise. It isn't just that they're big boys. They're big boys on a particular block. Will the "bigger K" be able to do the same?

The new K-Mart/Sears duo won't have the same kind of clout. Sure, it'll be tremendous in terms of market cap and store locations. But it will be divided between the discount retailer and the slightly more up-market component. This might be trumpeting my ignorance of retail, but I'm not sure where the combination adds much to either side of the equation. At the same time, I also don't see where any synergy between the two will come from. Perhaps there's a market for Martha Stewart linens and JoeBoxer underwear in Sears. But Craftsman tools and Kenmore appliances in K-Mart? Doubtful. (For the record, Cranky Dad suggested a few months ago that they develop a Martha Stewart-Craftsman Jailbar Hacksaw line. I'm sure that would be a real winner.)

Arguably this merger would be defensible if both companies were coming to the table from positions of relative strength. But I've got to wonder whether it's really a wise idea for them to attempt it right now.

It was still on the air?

2005-03-24T13:00:00.000-05:00

Sad news for all you financially minded PBSophiles out there: "Wall Street Week" will no longer be there for you, with or without Louis Rukeyser and/or Fortune.

The Cranky Economist remembers it well: That classily upbeat opening music, reminiscent of tickertape machines and old newsreels about Wall Street; Louis Rukeyser's comforting stately wise-old-man appearance; the deathly dullness. Well, that last item is just a result of my youth at the time. And more recently, when perhaps I might have been more interested in the program, I could watch CNBC all day every day, peruse a couple newspapers online, and then check out updated quotes and market news on a host of websites, all without having to sacrifice my Friday evenings. (Perhaps its Friday-night slot is an explanation for its failure to attract a younger audience as time went on.)

In its heyday before the dawn of niche cable channels and the internet, WSW was a major media player. No longer.

Just like PBS.

Not another GM post...

2005-03-24T09:30:00.000-05:00

Sorry I'm late this morning, folks -- internet was down at home. But I'm in the office now. So on with the show:

Yeah, the Cranky Economist knows. You're all tired of reading about it. But I'm not quite tired of writing about it yet. So we'll start this, the second week of TCE, with General Motors (and no, I don't have a short position in it; for the record, as a struggling journalist, I'm too poor to hold any position in anything right now).

Its stock price sank yet again yesterday, falling 2.98 percent. Why, you ask? Here's a clue. The health-care-expense cutting is a great idea. But the third paragraph of this AP article is potentially even more disconcerting in the long run than any short-term worries about labor relations:

[GM Vice Chairman Bob] Lutz said he hoped GM wouldn't have to phase out one of its weaker brands, such as Buick and Pontiac, at a time when competitors like Toyota Motor Co. are adding brands. But he said he and GM Chairman and CEO Rick Wagoner are determined to spend resources wisely.

Sure, Pontiac and Buick could use some major brand re-tooling; the former is struggling to compete with svelter sports cars, and, well, my grandpa drove the latter for years before he gave up the car keys. But for better or worse it has already shed Oldsmobile. Does GM really want to jettison yet another recognizable brand name? Are they really so sure that either of these two would be beyond rehabilitation?

Especially since, later on in the article, we discover that the real growth stock at GM these days is in Cadillac, GMC and Hummer. So that's (old-man) niche luxury cars, SUVs (in this era of rising gas prices) and niche luxury SUVs, respectively. That doesn't exactly spell lasting market share to me, although if I knew anything about anything I wouldn't be writing this blog.

Today's Second Social Security Post

2005-03-23T15:00:00.000-05:00

Another element of the report linked in the post immediately below strikes me as something worth writing about, since it will surely attract the attention of liberal bloggers, politicians and even economists:

For the trust funds to remain solvent throughout the 75-year projection period, the combined payroll tax rate could be increased during the period in a manner equivalent to an immediate and permanent increase of 1.92 percentage points, benefits could be reduced during the period in a manner equivalent to an immediate and permanent reduction of 12.8 percent, general revenue transfers equivalent to $4.0 trillion (in present value) could be made during the period, or some combination of approaches could be adopted.

Translation: "A payroll-tax increase is the most pedestrian possible solution to this problem, so we'll go ahead and suggest it so as not appear as if we have no ideas." And who can blame them for taking this approach?

Just so long as no one is tempted to take it too seriously. As much as both sides like to pretend that this is a cold, calculated, economic issue, it's not. At heart, how you tackle the obvious crisis in Social Security (yes, Mr. Krugman, there is one) is going to be colored by your answer to the question I allude to below: Whom do you trust more? Markets? Or Congress?

Congress has been a terrible steward of the "trust fund" so far. Our elected representatives are terrible stewards of just about everything. It's simply a fact of political life, and it's even partly our fault -- we expect them to give us the moon while wanting to pay only the price of a sea star in taxes. So as we consider the Social Security Trustees' recommendations, we need to think long and hard about whether depositing another 1.92 percentage points of our incomes in the laps of our politicians is really a feasible way of bolstering the system. Especially when, as the report goes on to say immediately after the passage quoted above, "[s]ignificantly larger changes would be required to maintain solvency beyond 75 years" anyway.

Insolvency cometh, and that right soon(er)

2005-03-23T14:30:00.000-05:00

Not that it matters, but the Social Security trustees report today that the system will be broke in 2041, a year ahead of schedule. The relevant passage goes thusly:

Annual cost will exceed tax income starting in 2017 at which time the annual gap will be covered with cash from redeeming special obligations of the Treasury, until these assets are exhausted in 2041.

To translate: For years now, payroll taxes have provided more income into the system than Social Security has disbursed to beneficiaries. In theory, this cash is supposed to have been held in the oft-discussed "trust fund." That trust fund is worth just about as much as the trust we have in Congress to not spend "free" money. Which is to say, not much. Instead, for decades we have been "borrowing" from the trust fund, taking the cash out and putting special Treasury bonds in. Starting in 2017, it will no longer be the case that payroll revenue exceeds benefits, so we will have to start cashing in those bonds. What I'm still trying to figure out is where the cash will come from, but that could just be me.

But whatever the details, the implications of this longstanding shell game are clear: Our retirement benefits are never really safe as long as they're in the hands of the government. Eventually -- in 2041, to be exact -- we're going to pick up that last shell and discover that there's no pea underneath. Liberal opponents of personal accounts argue that the government is more responsible than are the markets. If anyone has any actual proof of this, I'm all ears.

What a difference an ocean makes

2005-03-23T11:20:00.000-05:00

The Cranky Economist held off on getting a cell phone for several years, while all around me my peers were starting to chat away on the then-not-quite-as-ubiquitous-as-today devices. That all changed when I got to London a couple years ago. Not only were "mobiles" (as the Europeans snootily call them) even more common than in the States, but my landline wasn't working for my first three weeks in my new home. Enough was enough, and off I trotted to obtain a little blue Siemens phone and an Orange pay-as-you-go service plan.

What struck me at the time was the "inconvenience" of the plans on offer. Although I had not yet joined in the Stateside cellular revolution, I had seen a year's worth of TV ads from competing American service providers offering enormous new-service bonuses, free evenings and weekends, and extra minutes up one shining sea and down the other. Not so in England. If you sign up for a regular monthly plan, you get however many minutes you pay for and not a minute more, even if you're phoning home on a Sunday. There are extra fees for calling people who are not members of the same network you are. And these plans are uniformly more expensive than the American equivalents that offer the Yankee bells and whistles. Not to mention that, at least two years ago, they were all completely the same, at a time when American providers were bending over backwards to offer features (like Cingular's famous "roll-over") that would differentiate them from the competition.

In short, for a variety of reasons that the Cranky Economist only incompletely comprehends, British wireless operators have had enormous latitude to create their dream marketplace -- competitive, yes, but also very definitely price-setting. Now, however, they might be starting to wonder whether that's all about to change as no-frills competitors join the playing field (free site registration required).

Being a Cranky Economist and not a Cranky Telecoms Analyst, I have no idea how the entry of no-frills providers will or won't shake up the British mobile market. But that won't stop me from looking with some puzzlement at an odd marketplace -- where the customer base is saturated and prices are high, and yet no one is willing to embark on some American-style price-cutting.

Socked by S-Ox

2005-03-23T06:30:00.000-05:00

The Cranky Economist's small but growing fan club may recall that in Saturday's A&L, I pointed out that the pre-Sarbanes-Oxley laws had been perfectly sufficient to send Bernie Ebbers, a raft of former Enron execs and Martha Stewart up the river.

However, these pre-Sarbanes-Oxley regulations were not at all up to the task of creating mountains of expensive and wasteful red tape for companies across the economy. Never fear -- Congress, in its infinite wisdom, has solved this problem for us.

You'll recall that S-Ox was passed and signed into law even before the last little shreds of Enron-related paper had wafted to the floor of Arthur Andersen's offices. The theory was that the execs at Enron and WorldCom (and their accountants) -- who had already lied shamelessly and repeatedly about seemingly every aspect of their businesses to anyone who asked -- would have told the truth if only they had been required to sign off personally on their corporate financial reports and to certify corporate compliance procedures. While we're at it, anyone interested in buying a bridge?

So what we are left with is a bunch of avaricious former corporate officers who would have been going to jail anyway, while the rest of us dig out from under reams of new regulatory paper and the attendant billions of dollars in compliance costs -- costs that will haunt the economy from here to eternity, since this increased regulatory burden isn't intended to phase out. Economists will eventually perform studies that will quantify in dollar terms exactly how expensive this law has proven to be. What will that number mean for you and me in terms of lost economic growth? Impossible to say.

But at least we were all so impressed with Congress' corporate crime fighting that we re-elected them. So Sarbanes-Oxley appears to be working just as intended.

Those crazy investors

2005-03-22T16:14:00.000-05:00

Who says investors don't have a sense of humor? (hat tip to an anonymous friend of the Cranky Economist) Note the snide comment about the Cornell scholarship. Some bizarre nepotism awaits those who persevere to the end, too.

At least, this letter looks funny to those of us who didn't lose as much money in Star Gas Partners LP as did Mr. Loeb. So fellow Cranky Economists will temper their afternoon Schadenfreude with a consideration of the millions of dollars between these lines.

There's no point to this post, other than to point out that there really are human beings inside those swank buildings in Manhattan.

Fed raises interest rates...

2005-03-22T16:06:00.000-05:00

...by a quarter point. No surprise there -- the move was widely expected, and markets had essentially adjusted for it in trading yesterday. But an econ blog would be remiss in failing to mention it.

UPDATE (3/23/05 3:00 pm): Cranky Economist Ignorance Alert -- This turns out to have been a surprising move after all. Those in the know when it comes to the fine art of deciphering Fed-speak (which means just about every commentary except for yours truly) picked up on the fact that this statement contained an unusually strong warning on inflation, born out this morning by a surprising increase in the Consumer Price Index (CPI) and reflected in a significant dip in stock prices.

In my defense I will merely say that I only have the chance to be young and stupid once, and I intend to take full advantage of the opportunity.

Big Three Watch

2005-03-22T11:10:00.000-05:00

Yesterday, I briefly noted some emerging problems on the investor side at General Motors. But it's worth pointing out that the problem isn't confined to GM. The other two Detroit titans are in trouble, too. The common ailment of all three American auto manufacturers is their cost-structure, and especially the historically generous packages they have offered to their unionized work force.

However, an article in this morning's New York Times suggests that Chrysler is making progress on getting small health-insurance concessions from the United Auto Workers union (UAW). Certainly no small feat, and, if it sticks, a potential road to future cost savings (although, as the article notes, the introduction of relatively small deductibles for some employees is hardly going to make a dent in overall health costs any time soon).

Yet there is an even bigger problem lurking: pensions. The pension landscape in the pre-401(k) industrial-economy days was marked by large manufacturing giants who would offer their workers generous defined-benefit pensions. And the Big Three are no exception. Even if they were to magically switch their entire current labor force over to defined-contribution plans (like those 401(k)'s) today, they would still have enormous defined-benefit liabilities from the current cohort of retirees the pension plans are supporting.

Which is why trouble in Detroit is a major economic story, and not just a business-page oddity: The taxpayers have to pick up the pieces of these pensions if any of the companies go under. As far as I know, these liabilities are covered under the Pension Benefit Guarantee Corporation, a quasi-public insurer that guarantees retirees a certain pension payment if their erstwhile employer folds. Under normal circumstances the PBGC should be able to support itself the way any normal insurance company would, charging premiums over an actuarial pool that includes all the companies that offer defined-benefit pensions. But lately it's been looking a little undercapitalized (since most healthy companies have shifted to defined-contribution plans, and thus avoid paying premiums into what is essentially a corporate pension-insurance program). So if one or two major bankruptcies should push the PBGC over the edge, taxpayers will be on the hook to meet those obligations, a result of the PBGC's quasi-governmental status.

That all brings us back to the Big Three via the following path: Cranky Economist predicts that, as the automakers step up negotiations with the unions to bring down short-term labor costs, we'll see them increasing the promises they make under their defined-benefit pensions. It's a great ploy for the companies, which is why it's been such a popular tactic in the airline industry: Get your workers to take a pay cut today by promising them better pensions tomorrow. If your business improves, it's more convenient for you to pay them in the future. And if you fold anyway, the PBGC is there to take care of the retirees. Well, us taxpayers ought to care about this, since we can't rule out the possibility that we'll have to pick up the slack down the road.

Bottom line: What happens at the Big Three is everyone's business. We'd better hope that their managements don't make promises they can't keep.

Executive compensation is in the news...again

2005-03-22T07:00:00.000-05:00

File under "Who Would Have Thought?" -- "Executives Cash In, Regardless of Performance" (from the Washington Post). The crux of the matter:

At many other corporations untouched by scandal, pay continues to climb whether performance is great, lousy or middling.

Now executive compensation is a thorny issue. Conservatives (and many economists) argue that those high compensation packages are set in a competitive marketplace so we should assume from the get-go that they are efficient, and that without the high salaries, the stock options, the extravagant pensions and the golden parachutes companies would find it impossible to attract economic-value-increasing quality execs. And the people who make this argument have a point. Particularly in the face of opposition from liberals and populists, who don't have much of an economic argument, no matter how compelling their moral case may or may not be.

Into the fray step Lucian Bebchuk and Jesse Fried with their recent book Pay Without Performance. (Bebchuk has been hammering away at this issue for a while, and is even quoted in the above-linked WaPost article.) This is an interesting book because it so convincingly explains why the traditional economic models of executive compensation are deeply flawed. In short, the old ways of modeling compensation negotiations have downplayed the significance of personal ties between boards and executives, and have not accounted for non-economic motivations that might drive the participants in the negotiations.

Still, no matter how correct Bebchuk and Fried may be about the models, the glaring real-world question is, What are we going to do about it? And perhaps this is a problem without a solution. Unfortunately, corporate boards are the units best suited to making compensation decisions. Even if they do it terribly, they do it better than anyone else would. Meanwhile, we have no way of even guessing what compensation packages would look like in some mythical more-perfect corporate universe.

So let me propose the Cranky Economist's Might As Well Be Principle: Executive compensation, like so many other facts of economic life, is not efficient. But it might as well be -- no one will be able to do it more efficiently, so we will never have any way of measuring (by comparison) precisely how inefficient the current system is. Pro-business conservatives should win this argument, but they shouldn't be happy about it. At the end of the day we're still stuck with a system that will continue to reward execs who drive their companies into the ground.

The next big collapse?

2005-03-21T19:39:00.000-05:00

More bad news for General Motors. Bonds from America's third-largest issuer of corporate debt are barely rated above junk status right now. And bowing to investor pressure, GM is trying to shrink its white-collar work force by offering a buyout plan.

I'm the first to admit that I haven't been following GM closely (or at all) recently. But -- we're in the middle of an economic recovery that has been marked by, among other things, big-ticket consumer spending hastened by ridiculously low interest rates that make the terms of, say, car loans look especially attractive. So...am I wrong in wondering what's been going on in that executive office suite?

There they go again

2005-03-21T06:30:00.000-05:00

For about the past year and a half, the Euro has been running stronger than the dollar -- sometimes a little stronger, sometimes much stronger. And for the most part everyone's been coping passably, although the shift has been noticeably more painful for some European exporters than for others.

But does this signal that the Euro is the new "master currency," that the Euro-zone is now poised to rival America's economic hegemony? Some Americans seem worried about this. They needn't be.

European deficit spending is why. Years after the Euro-zone big boys started violating the currency's Stability and Growth Pact restrictions on deficit spending, the member nations have agreed to move the goal posts. I'm already on record discussing the relative merits of deficits American- and Euro-style. Here it suffices simply to point out that in America, the Congress' latest budgetary adventurism suggests that the lunatics are running the asylum. Europe, however, now seems to have a much more serious problem: No one is running the asylum.

Sunday NYT Front Page Story that's not Front Page News

2005-03-20T13:03:00.000-05:00

Here it is, the much-promised Sunday New York Times feature of my blog. I was originally going to hunt for the most offensive article in the A section each week. But in any given week I would either be overwhelmed by contestants for that title, or (like today) underwhelmed by the sheer inanity of the section.

So instead I present a re-designed Sunday feature: The New York Times Front Page Story That's Not Front Page News. Herewith the inaugural FPSTNFPN:

An article about the large number of grandparents that a growing number of young children have as a result of two or three generations of easily obtainable divorce. Interesting as a sociological matter, or just as a lifestyle column. But is it front page news? This, this, and even this, although all flawed in the normal NYT way, might have been stronger contenders in terms of newsworthyness. Instead they are buried on A8, A17 and A25 respectively.

With that, have a pleasant weekend. I'll be back on track tomorrow, with more interesting business and economics news.

Saturday Assets and Liabilities

2005-03-19T08:25:00.000-05:00

Taking a break from the fevered two-post-a-day schedule I've been on for the past two days, I introduce a new Saturday feature: My cheers and jeers for the week. But since I'm an economist, I feel compelled to call it "Assets and Liabilities" (If I'm feeling ambitious tomorrow, I might roll out a feature on the New York Times -- I might as well get my money's worth as a Sunday subscriber... Otherwise, see y'all Monday.)

Anyway, here you go.

Assets

The Bernie Ebbers jury. Their deliberations were, well, deliberate (40 hours over eight days), and in the end they weren't fooled by his claim that he just hadn't had a clue that his most senior managers were driving WorldCom into the ground. His hubris and rapacity were bad for WorldCom's employees, for its investors, for its customers and now for Ebbers himself.

Which invites two comments. The first is that, as the Wall Street Journal noted in an editorial earlier this week, the legal system is capable of cleaning up wrongdoing even without Sarbanes-Oxley. Ebbers wasn't charged under the new law -- and the old laws appear quite sufficient to send him to jail. The second is that an ordinary jury can in fact sort through a complicated corporate case. Following last year's shenanigans around the trial of former Tyco chief Dennis Kozlowsky, some lawyers had been nattering that we needed to create a special legal track for corporate cases, on the theory that the cases' complexity demands expert adjudicators. Perhaps that's not so, after all.

Liabilities

Airbus, and its European sugardaddies. U.S.-Europe negotions broke down yesterday over ending government subsidies for the European aircraft manufacturer. The U.S. argues that these subsidies are illegal, and cares about ending them because America has a particularly big horse -- Boeing -- in this race, too. Given that the two companies are locked in a cosmic death struggle for the hearts and minds of airlines everywhere, Boeing is understandably concerned that government support for the other side is skewing the market.

The European defense is that all the kids are doing it; Boeing is subsidized, too. Which is (only sort of) true. On account of its defense contracting business Boeing has a symbiotic relationship with the U.S. government. But there are a couple interesting distinctions. The bulk of Boeing's "subsidy" comes in the form of government contracts, so in theory it's a true business relationship (even though the vagaries of the Congressional budgeting process lend themselves to overexpenditures that can look an awful lot like a subsidy). And it's at least more subtle than what the Europeans are doing. Compare that to Airbus, which over the years has received outright grants and low-interest loans to the tune of hundreds of millions of dollars.

It's nothing against Airbus -- as a passenger, I think they actually offer some products that are superior to their Boeing competitors. But isn't it time for the European hatchling to fly out of the nest?

Let the good times roll...

2005-03-18T16:28:00.000-05:00

More on the World Bank, goshdarnit. There is, it would appear, trouble in paradise:

Although many bank insiders and observers predict that the odds strongly favor Wolfowitz eventually getting the job, the furor yesterday indicated that at the very least a fight will rage for several weeks before the board approves him.

Of course, in such a situation, it always helps to consider the source. And if we believe the Washington Post (a reasonable thing to do, since it's not the New York Times), one of the more prominent COWs (critics of Wolfowitz) is a British MP named Clare Short, former Minister for International Development. Two things are worth noting about her. First, she's the former minister because she resigned her government post on the eve of the Iraq war in 2003. Second, well, she's an idiot. (I Googled "Clare Short" and that link was exactly the sixth result to appear.)

With enemies like these, you must be on the right track.

Toys 'R Whom?

2005-03-18T08:03:00.000-05:00

Toys 'R Us will be bought out later this spring for up to $6.6 billion. The lucky winners of the recent bidding war for the troubled toy-seller include a leveraged-buyout firm, the private-equity company that also owns Dominos and Staples, and a real-estate specialist.

A deal of this sort wouldn't ordinarily raise many eyebrows, and for the most part it's not raising mine. But I'll just comment on this phrase from a larger WSJ article (which I won't link since it's subscription-only):

Toys "R" Us Inc. achieved its goal of boosting shareholder value by agreeing to be acquired...

This is certainly one strategy for "boosting shareholder value." And the deal certainly will do that: The announced value of the deal--$26.75 per share--represents a not-insignificant premium on the recent stock price. Still, we probably shouldn't assume that this value boost is going to save the company.

Although everyone is saying that the purchasers intend to rebuild the Toys 'R Us "brand" to compete with the toy departments at WalMart and Target, there's no escaping the fact that one of the Toys 'R Us-buying troika is a real estate investment company. Even if this deal keeps the toy store complete (over the past few months we'd seen speculation that it would be split up and sold off in parts), executives seem to be protesting just a bit too much that we're not about to see a big real-estate sell-off.

What's the moral of this story? There isn't one, really. Should we mourn the fact that erstwhile titan Toys 'R Us is falling victim to discounters like WalMart and Target? No. The pair are winning the toy wars because they're delivering what parents want at prices they can afford. So if it turns out to be true that the parts of Toys 'R Us--its real estate holdings--are worth more than the sum, this deal will be a great way for investors to cash out and for those locations to be converted to better uses. The march of progress...

Wolfowitz to the rescue!

2005-03-17T22:16:00.000-05:00

Having already written about Bush's new pick to head the World Bank once in the past 24 hours, I don't intend to do so again.

Instead, I will merely capitalize on the attention the controversial nod has focused on the Bank by recommending two fairly recent books on economic development that offer interesting insights into the Bretton Woods institutions.

In Why Globalization Works, FT columnist Martin Wolf most notably points out that the IMF isn't all that bad. An unusual argument indeed, when most kind-hearted economics professors and professionals these days bemoan the Fund's one-size-fits-all policy prescriptions. Even though that one prescription is precisely what's needed by each recipient of the Fund's tender loving care, since they all get themselves into crises in exactly the same way.

Meanwhile, whether he intended it to be this way or not, Sebastian Mallaby's The World's Banker presents outgoing Bank head James Wolfensohn as an object lesson in how not to run an international institution. One quickly reaches the conclusion that Wolfensohn was a terrible pick for the job: His boundless energy paled in comparison to his amazing lack of focus, and his scattershot management style didn't help any. Could Wolfowitz be any worse? Certainly not.

Fannie May Not...

2005-03-17T21:37:00.000-05:00

...file its 2004 financial report to the SEC on time. In fact, it definitely won't. Surprise, surprise.

However, there's more to that 4.3 percent price drop than meets the eye. Also in today's news, we read that John Snow and Alan Greenspan will be testifying about Fannie Mae (FNM) before the Senate Banking Committee in just a couple weeks.

This raises an interesting question: Is the market reacting to the bad news about the fundamentals (that bad news being that no one will know for a long time precisely what those fundamentals are), or is it responding to political risk? I raised this question once before, in my pre-blog days, and I like to think that subsequent events have proven me right. In fact, on the very day that TAE column appeared, Fannie's stock price dove once more, driven (arguably) by news that Congress was taking a renewed interest in the housing enterprise.

The most likely explanation for FNM's precipitous decline is a combination of both factors. The fact of the matter is that there are two distinct problems with Fannie. The first is accounting that was probably criminal (I'd bet on indictments before Christmas). But the second, deeper problem is structural. Even if its books were pure as snow, Fannie's and Freddie's unusual and outdated relationship with the government would still expose them, their investors and, ultimately, everyone else to all sorts of risks.

So the real question is: Will Congress be able to see through the scandalous accounting to what lies beneath? Sadly, the indictments are a much stronger bet by far.

Welcome

2005-03-17T19:41:00.000-05:00

Welcome to The Cranky Economist, yet another Washington blog. I, Joe, am your fearless leader, with able help from any friends I can con into posting here. Check this space every once in a while for an engrossing selection of my finest musings (or ramblings...) on economic and business news, and even some politics.

With that, let the games begin!